NBC Universal-Apple Spat is Good for Microsoft

NBC Universal's distribution deal with Amazon's Unbox service should boost Microsoft's Windows Media's profile with an important audience: Content producers. Microsoft has wooed content producers for years, with only modest success. NBC Universal could tip some weight to Microsoft and away from Apple.

Recap: Last week, NBC Universal said that it would not renew its presumably lucrative distribution deal for the iTunes Music store. The statement seemed more like a trial balloon, a negotiating tactic for leverage with Apple. The response from Apple: A press release saying that the iTunes Music Store would not carry any NBC TV programs for the new program season, even though the NBC Universal contract doesn't expire until December. The press release also claimed that "Apple declined to pay more than double the wholesale price for each NBC TV episode, which would have resulted in the retail price to consumers increasing to $4.99 per episode from the current $1.99."

What NBC Universal really wanted was stricter control over usage rights and bundling of TV shows, both of which Amazon is ready to deliver. Maybe, from Apple's perspective, bundles would have raised prices if certain programs were restricted to bundles rather than being available ala carte. Also, Apple insists on fairly liberal—and so nearly invisible—usage rights. Consumers can play content on up to five computers and multiple iPods or iPhones.

Unbox offers movies and TV shows for consumption on TiVo or PC and devices supporting Windows Media DRM. Portable device support requires PlaysForSure, which Microsoft wants to eventually replace with PlayReady. Microsft designed Windows Media DRM such that the content owner or distributor sets the usage rights. Unbox usage rights are much stricter than iTunes Music Store: "2 PCs or TiVo DVRs and 2 portable video players at the same time," according to Unbox terms. Unbox also restricts content to one account on one device; consumers are restricted from playing content purchased or rented from two different accounts on any one device.

The usage rights are unfriendly to families, where couples or parents and kids might have separate Unbox accounts. Where Apple's approach makes more sense: JupiterResearch surveys consistently show that consumer don't mind DRM as long as its invisible. Rights restrictions create consumer resistance—and potential animosity towards the content distributor or technology provider.

Still, rights selectivity—and choice—is a major Windows Media DRM selling point. Content purchased from Unbox can be played on Windows PCs, including Media Center, and many more portable devices, including cell phones, than iPod or iPhone. NBC TV content distribution through Unbox also gives Microsoft an unexpected, new Windows Media DRM showcase customer.

The potential benefit to Amazon and Microsoft is significant. "NBC supplied iTunes with three of its 10 best selling TV shows last season, accounting for 30 percent of iTunes TV show sales," according to Apple.

Suddenly, it's role reversal for Microsoft, in a couple of ways. Before the launch of the iTunes Music Store, Microsoft developed Windows Media DRM with expectation content providers would find the rights flexibility and security to be appealing. But Microsoft met resistance for several reasons, one being some distrust of a company with so much influence. Movie studios and music labels are used to negotiating on their terms. Meanwhile, Apple unexpectedly launched iTunes Music Store and leveraged success off of iPod, which punched a huge hole in Microsoft's digital media strategy. Apple's DRM format came to proliferate instead of Microsoft's. Role reversal: Microsoft got beat back from an unexpected competitor, and on its own dominant platform.

Roles are reversing in another way, potentially to Microsoft's advantage. NBC Universal wants to set the terms for its content, whether rights or packaging. Amazon is ready to offer NBC Universal more suitable terms, and the underlying technology happens to come from Microsoft. It's only a matter of time before more content providers, like Universal Music Group, move beyond the iTunes Music Store because they want more control. Microsoft and partners like Amazon should be ready to embrace them—with arms wide open. Apple's dominance may yet drive more content producers and providers to reconsider Windows Media benefits.

Microsoft's future digital media emphasis is really PlayReady, which offers much more flexibility than Windows Media DRM. For one, Microsoft supports multiple file formats, including AAC and H.264. PlayReady also enables more flexible usage scenarios, including pay per view and subscriptions.

Windows Media DRM also enables subscription content, which could be one of the sticking points between Apple and NBC Universal. Apple will make some new product announcements in about 90 minutes. To date, the company has resisted offering subscription content. Subscriptions would be a dramatic departure for Apple.

With Unbox, NBC Universal would have the option to offer some TV shows for rental. For some shows with ongoing story lines, renting a whole season to watch back to back could be an appealing option.