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iTunes users may have to say goodbye to hit TV shows like "Heroes" and "The Office" come December. NBC Universal confirmed Friday that it has notified Apple (Nasdaq: AAPL) it will not renew its current contract to sell its television programming as digital downloads through the online store.
"As a condition of our contract, NBC Universal has notified Apple that it is not renewing this contract," Amy Zelvin, a NBC Universal spokesperson, told MacNewsWorld.
The iTunes contract stipulated that NBC Universal (NBC U) notify Apple of its intent to cancel 90 days prior to the expiration date, otherwise the contract would automatically renew. An article in Friday's edition of The New York Times reported that negotiations between the two companies continued, but that they had reached an impasse in a dispute over pricing.
Playing Hardball
NBC U's contract does not expire until December. However, Apple on Friday said it will not sell NBC television shows for the upcoming 2007-'08 season on its online music and video store. The decision came, the company said, as a result of NBC U's demand that Apple "pay more than double the wholesale price for each NBC TV episode." The cost for consumers would increase to US$4.99 per episode, $3 more for each episode than the current price of $1.99.
"We are disappointed to see NBC leave iTunes because we would not agree to their dramatic price increase," Eddy Cue, Apple's vice president of iTunes, said. "We hope they will change their minds and offer their TV shows to the tens of millions of iTunes customers."
Rather than provide its users with a half a season of programming, Apple said it decided to forego the entire season set to begin in September.
ABC, CBS, FOX and The CW, in addition to more than 50 cable networks, Apple said, are signed up to sell TV shows from their upcoming season on iTunes at the $1.99 per episode price. iTunes, according to data from consumer sales 
tracking firm NPD Group, is the most popular retail video download site, selling some 67 percent of videos downloaded. The site, according to Apple, sold 1 million video downloads within 19 days of its video launch in October 2005.
No Longer the Only Game in Town
Hulu, the recently named joint venture between NBC U and News Corp., parent company of FOX, is one reason NBC U has assumed such a strong stance, James McQuivey, a Forrester Research analyst, told MacNewsWorld. The online video site collaboration will offer users access to many NBC and FOX shows as on-demand video. It will also be available through AOL, MSN, MySpace, Yahoo (Nasdaq: YHOO), CNet and Comcast (Nasdaq: CMCSK).
"This move my NBC Universal is certainly related to Hulu.com," McQuivey explained, "not because they feel iTunes competes with it, but because Hulu.com and the many sites like AOL.com and Yahoo.com that it will partner with represent a more important strategic focus.
"Once all NBC shows are available, ad-supported, online, then the bulk of digital viewing will shift from iTunes to the free, ad-supported alternative," he continued. "NBC and the rest of the major networks will rightly focus on that effort first, considering selling a few million videos through iTunes to be of little consequence compared to billions of ad dollars that will shift to online video over the next few years."
The real question, McQuivey said, is whether NBC needs to signal its change of focus or if it could have easily left well enough along and renewed the contract.
"That's where we get into the nitty gritty about this industry -- nobody in the TV or movie business really wants to help Apple do to video what it did to music -- that is, become the dominant electronic reseller," he pointed out. "So NBC is taking advantage of this opportunity to make sure terms are more favorable to it in the future and that it doesn't inadvertently build a monopoly video business at Apple."
A Universal Problem?
NBC U offers some 1,500 hours of programming, including entertainment, news and sports shows, through the iTunes store. Of the site's top 10 sellers for the last season, three came from the peacock network and accounted for 30 to 40 percent of iTunes video sales.
NBC U's revolt against Apple's rigid pricing scheme, which restricts the price of shows to $1.99 and movies to $9.99, follows the decision by Vivendi's Universal Music Group (UMG) to allow its contract to lapse. Instead, the music maker said it would sell its content "at will" -- a move that could allow UMG to pull its content as the two companies continue negotiations.
The announcement in July from the world's largest music company once again stems from a battle over Apple's flat 99-cent-per-song prices and UMG's desire for a looser pricing scheme. The major music labels for the past few years have chafed under Apple's dogged refusal to bump up pricing.
In the end, McQuivey predicted, Apple and NBC U will strike a deal . Apple, despite its dominant position, needs the content as it pushes its recently released Apple TV and iPhone devices and the rumored new iterations of the iPod this holiday season.
"We have several months to go, and Apple can't afford to take any wind out of its sails right now, especially as it pitches the Apple TV, the possible new versions of the iPod it may want to release in the run-up to the holidays. They'll want to send a strong signal that Apple can provide video on those devices for years to come.
However, in the wake of Apple's response to NBC U's contract renewal notification, McQuivey stated it is possible that the device maker has decided it is going to lose this business and is trying to make sure no one blames them for it.
"[The statement was an] incredible bit of positioning on the part of Apple -- and probably unwise for a company so dependent on a major supplier like NBC for its content to take such a dramatic tack," he pointed out.
Generally, negotiation points such as price disputes are supposed to be confidential, McQuivey added, and from the sounds of things, it seems that Apple and NBC U are engaged in more than just a simple spat but are "on the verge of divorce.
"This doesn't bode well for Apple because, frankly, there are way too many alternatives to iTunes for people who want to watch these shows. There's your DVR, NBC.com, now Hulu.com, and soon your cable system VOD (video on demand) lineup, which will be adding prime time episodes gradually over the next year."
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