Can Apple’s iCloud Save Hollywood?

Can Apple’s iCloud Save Hollywood?

by Tony D’Altorio, Investment U Research
Tuesday, June 28, 2011

In recent years, the bright lights of Hollywood dimmed as its revenue declined, thanks in large part to the advent of new technologies.

Income streams from sales of CDs and DVDs slowed to a trickle thanks to the streaming of media via the internet and companies like Netflix (Nasdaq: NFLX). Netflix is now the largest subscription entertainment company in the United States. It has over 23.6 million subscribers and accounts for 30 percent of all internet downloads in the United States during peak hours.

The technology Hollywood believed could help them – 3-D films – is a flop: Audiences are put off by the high ticket prices.

But now, as if from a Hollywood movie, another technology has appears on the horizon – the cloud. And it could be the technology that saves Hollywood…

The Cloud Creates a New Income Stream for Hollywood

Industry executives believe that cloud computing heralds the latest sweeping change to consumers’ behavior.

They see the cloud as the first technology product that holds the promise of enhancing the industry’s revenue rather than destroying it. It represents an opportunity, instead of a threat.

One reason for executives’ optimism is the income stream already received. Netflix and Hulu are already writing large checks for Hollywood’s content.

• Companies like Amazon (Nasdaq: AMZN), Wal-Mart (NYSE: WMT), Microsoft (Nasdaq: MSFT) and Sony (NYSE: SNE) are also in the market for content.

• As are cable firms such as Comcast (Nasdaq: CMCSK). Cable companies are increasing their on-demand services for subscribers, which requires more content, as they try to combat the threat posed by companies like Netflix.

• Apple (Nasdaq: AAPL) will also be writing checks to Hollywood in the not-too-distant future once it implements its own movie-streaming service, which will be part of its recently-announced iCloud online entertainment service.Apple’s unable to get its iCloud movie service going because several major movie studios are tied up with HBO, which is owned by Time Warner (NYSE: TWX). The HBO agreement does not allow for continuous movie availability for streaming services.

Hollywood Content Holds Power Over Cloud Distributors

As the aforementioned companies, and others, fight to control the distribution of film and television programming – the power falls in the hands of the content providers.

As Anthony DiClemente, an analyst at Barclays Capital, stated, it “bodes well” for the pricing power of Hollywood studios, which provide the content.

He based his analysis on the improving conditions in the music industry, another one of the cloud’s possible content providers.

The music industry’s response to Apple’s iCloud music service was positive, most likely due to Apple’s generous terms, which would give them 70 percent of iCloud’s music revenue.

Apple’s iCloud music service prompted both Amazon and Google (Nasdaq: GOOG) to roll out similar services. Record industry executives hope to use the agreement with Apple as a standard in their negotiations with Amazon and Google.

Can Apple Save Hollywood?

Hollywood’s fortune seems to be turning around, as it looks like content providers will be the kings of the cloud.

Meanwhile, distributors like Netflix will be left in a mad scramble, trying to outbid each other for the right to distribute Hollywood’s content.

The only question remaining for Hollywood is: How deep are the pockets of the content distributors? Can they continue making lucrative bids for content from Hollywood studios and still remain profitable?

Questions already swirl around Netflix and its business model, making Apple’s entrance into the fray that much more important for Hollywood – ensuring that Hollywood has at least one deep-pocketed distributor for its content who will be there for years to come.

Good investing,

Tony D’Altorio