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Tuesday, October 10, 2006, 06:00 am PT (09:00 am ET)

Two studios seen joining Disney on iTunes post holidays

Two major motion picture studios have indicated that they expect to join Walt Disney in offering their film content on Apple Computer's iTunes Store within six months, says one Wall Street analyst.

PiperJaffray analyst Gene Munster made the comments in a research note on Tuesday, after having met with four of the six major film studios to discuss various topics, including issues related to offering content on services such as iTunes.

In a summary of his findings, Munster said he believes there are three key reasons why other studios are taking their time in opening up film libraries to iTunes — mainly "retaliation" concerns on the part of retailers, copy protection issues, and a desire to have a more flexible pricing model.

Retaliation

Studios, which generate a major portion of their revenue from DVD sales, have long relied on big-box retailers, such as Wal-Mart, Target, and Best Buy to fuel their profit margins. But new services such as iTunes often undercut DVD pricing and have generated concerns from retailer about the impact it will have on their DVD sales.

"It is possible that retailers will shift focus to other products if DVDs become less profitable due to lower priced online competition," Munster told clients. "Some of the studios refer to this as "retaliation" and they are concerned that this could significantly disrupt current business models in the DVD market."

Content protection

While Munster said the disruption of the current DVD business model was the biggest issue brought up by the four studios he met with, each is also concerned about the protection of content.

"For most studios, they are happy to see Disney serve as a 'guinea pig,' and we expect that if Disney's content continues to appear to be relatively safe from casual pirates, other studios will become more comfortable with offering content on iTunes," the analyst explained.

Studios still unhappy with limited pricing flexibility.

Meanwhile, Munster said that two of the four studios he met with indicated that the pricing on iTunes is a significant hurdle. Specifically, those studios want to have the ability to price certain movies at a premium to less popular content and are opposed to Apple's rigid pricing strategy, he said.

More studios to join iTunes within six months

"A couple of the studios indicated that they expect to have content on iTunes within six months, but it may require some tweaks to Apple's pricing guidelines to get them there," Munster told clients. "We would not expect additional studios to sign on with iTunes before the holidays, however, as most studios recognize that this change could disrupt their holiday business at retailers."

The analyst maintains an "Outperform" rating on shares of Apple Computer with a "Medium" volatility indicator. His twelve-month price target is set at $99 a share.