By Jon Fortt
September 12, 2007

It was a convincing argument a few years ago, when the iPod was young and the world doubted people would pay for music tracks they could easily pirate for free: Apple (AAPL) CEO Steve Jobs insisted that iTunes prices needed to be fixed at $.99 per song to keep people coming back.

Later, the same went for TV shows: $1.99 a pop, Jobs said, no exceptions.

But is it time for Apple to rethink that position – at least for video?

News Corp. (NWS) President Peter Chernin obviously thinks so. The chief of the company that offers shows such as 24 and Prison Break on iTunes offered a subtle warning to Apple this week about its video policies. Speaking to a Reuters reporter in Poland, Chernin said that while “right now we have a perfectly good relationship with Apple,” the pricing issue isn’t going away. “We’re the ones who should determine what the fair price for our product is, not Apple,” he said.The warning shot comes days after NBC Universal (GE) had an uncomfortable public spat with Apple over pricing in the iTunes Store. First NBC leaked news that it would pull next season’s shows from iTunes. Apple responded on August 31 with a statement that NBC made unreasonable demands – NBC wanted to double the wholesale price it charges Apple for the content.

Chernin has a point. Lost in the drama is the question of why Apple cares what NBC, Fox, or any other network charges for video. If NBC executives want to raise prices above those of the other networks, why not let them? If the price is too high, as Apple contends, the result will be that customers will buy shows from rival networks instead. But if NBC finds that consumers are willing to pay the higher price, the higher profit margins should make both NBC and Apple happy.

The tension is growing as iTunes has made Apple the third-largest U.S. music retailer behind Wal-Mart (WMT) and Best Buy (BBY). Because of Apple’s leadership in digital entertainment downloads, no one these days doubts that large numbers of consumers are willing to pay for digital content, as long as the customer experience is pleasant.

One thing the networks do doubt, however, is that Apple has their best financial interests at heart. Apple has not been shy about the fact that it does not make much profit selling content on the iTunes store; mainly, the company uses iTunes as a platform for selling more iPods. iPods, by contrast, tend to be enormously profitable – Apple typically makes better than 20 percent margins selling them. So while the networks maximize profits by selling shows for as much as consumers are willing to pay, Apple maximizes profits by selling network content for as little as it can get away with.

Apple’s newest iPod lineup gives the studios even more cause for concern. Now, for the first time, every iPod with the exception of the screen-less $79 shuffle plays video. Apple clearly sees video as an important selling point for this latest batch of iPods – which means it needs to get consumers more excited about downloading it. The studios can see the dollar signs in Apple’s eyes, and they see Apple’s profit coming at their expense.

Who knows? Maybe Apple’s right about the pricing of video downloads. But unless Steve Jobs & Co. allow the networks to figure that out for themselves, they risk alienating the iPod’s most powerful video allies.

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