Estimating Financial Impact of iTunes/NBC: Small, For Now, But We Still Expect Reconciliation

What's at stake financially in the battle between NBC and Apple over video downloads? Right now, almost nothing. For the future, however, the precedents are very important.

Here are some back-of-the-envelope estimates:

Apple keeps about 30 cents or less when it sells a 99-cent song on iTunes.  We believe a similar ratio applies to its $1.99 TV shows (if anyone can offer more detail, please do). So, we assume that when iTunes sells an episode of, say, Heroes, NBC Universal keeps about $1.44 and Apple about 55 cents. Forrester analyst James McQuivey estimates in WSJ ($) that Apple sold about 50 million video downloads in the first half of the year.  NBC says it accounts for 40% of those sales (via the NYT), and Apple says it only accounts for 30% (via release). So call it 35%

REVENUE

Est. annual revenue for iTunes video sales: 100M x $1.99 = $200 million.
LESS: NBC portion: $200 million x 35% = $70 million
iTunes video revenue post NBC defection: $130 million

OPERATING PROFIT

Of the $70 million of NBC video revenue, we estimate that Apple keeps a bit less than a third, or $20 million, and pays about $50 million to NBC. With numbers this small, the impact on profitability isn't a huge concern.  Most of NBC's cut probably drops to the bottom line (it only has to pay a handful of pennies to rights holders for each sale), while Apple probably does a bit better than break-even, as it does with music sales (bandwidth costs plus overhead plus transaction fees eat up most of the revenue).

The sums here are rounding errors for both companies. So why does it matter? 

Apple's iTunes store exists primarily as a way to promote iPod sales (and, down the line, perhaps gizmos like the iPhone and Apple TV). The pitch is one-stop shopping: Come to us, and you'll find all the music, TV, etc. that you need, in one place, with one pricing scheme. It's simple and it works. Steve Jobs doesn't need the revenue that NBC generates. But he does need to make sure consumers can find whatever content they want at his store. If they have to go elsewhere for that content, that new video iPod may look less appealing.

Similarly, Jeff Zucker at NBC doesn't want to be locked into selling his product exclusively through Apple -- he can see how unhappy the music labels are about that arrangement. He'd like options -- like, say, Hulu. But walking away from Apple will be risky for him as well.  For starters, no other company has proved it can equal Apple's expertise at providing a seamless experience.

This is an ugly spat for now. But expect it to end with a reconciliation.