Apple’s Tablet Computer: The DVD Killer

The music industry never saw the Apple (NASDAQ:AAPL) iPod coming. The iPod was an expensive toy when it was introduced in 2001. There was no reason to think it would do well. Digital multimedia players were not part of mainstream consumer electronics.

The music industry has trouble tracking its own sales but data from research firm NPD indicate that Apple’s ITunes download store made up for 25% of all music unit sales in the first half of the year. The portion of the market held by CDs is now 65% and falling. The record industry hates Apple for taking what analysts believe is 10 cents on every 99 cent song downloaded. The industry hates Apple for having control over content distribution and pricing, but it loves Apple for the checks it writes to music publishers and artists every year.

Many executives at the largest media companies have been concerned for several years that they will have the same problems with their premium video content as they did with their music. The films and TV shows are pirated and sent around the Internet by file sharing services. The media companies get no income from that.  Studios and TV producers are currently experimenting with scores of distribution schemes. Time Warner (NYSE:TWX) has suggested that a consumer with a cable subscription should be able to watch the video content he would get on his TV on any device that he owns. A Time Warner (NYSE:TWC) customer could watch HBO on his phone, his PC, or his iPod. Other large media companies are putting their video content on advertising-supported Internet sites, the most visible being Hulu. Most of the industry hopes that Google’s (NASDAQ:GOOG) YouTube will be able to start a similar service because it has by far and away the largest number of video views of any website in the world.

There are some media companies that want to more closely control who can see their content and when. They use services like the Netflix (NASDAQ:NFLX) movie streaming service which sends premium content to people’s homes, but these customers cannot take that video and watch it on their iPods or send it to a friend.

So far, no new means of digital distribution of video content has been anywhere nearly as successful as the traditional theatrical release followed by DVD sales model which has kept the industry rich for years.

There have been rumors for months that Apple will launch a tablet PC. It will probably look like a very large iPod with a 10 inch screen. It will be thinner than most laptops and will not have a separate keyboard. It will be, in essence, as close to a portable TV screen as any other widely available device.

Steve Jobs is certainly not the sort of person who would take advantage of a struggling industry’s hardships, but he is an entrepreneur and knows a good opportunity when he sees it. Apple controls the high-end of the PC market and is in the process of taking ownership of the high-end of the cellular handset business. Jobs has an iTunes store that has already been used to download over two billion applications for the iPod and iPhone and to distribute hundreds of billions of songs. The iTunes store is already one of the most important points of distribution for movies and TV shows in the world. The hardware disadvantage Apple has is that many consumers do not want to watch a movie on a 2-inch handset or iPod screen or a bulky laptop. A tablet is neither of those. It is, in fact, a nearly perfect video viewing device.

Apple does not have the answer to all the video industry’s digital distribution problems, but it has a partial answer to many of them. Large media companies may not want to hear those answers because they mean Apple gets a large measure of pricing and distribution control. But, that may be better than the alternatives of piracy and online advertising models that have shown little promise of economic reward.

Jobs has a history of being in the right place at the right time with the right product, all almost certainly by design. He controls the world’s largest digital content store and he controls many of the world’s small multimedia screens because Apple has sold over 200 million iPods and 34 million iPhones. The Apple tablet PC is likely to take the digital video industry by storm whether the large media companies like it or not.

Douglas A. McIntyre