Blockbuster Takes Aim at Apple TV

The movie rental giant could run into problems competing against Apple.
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SAN FRANCISCO -- Movie rental giant

Blockbuster

(BBI) - Get Report

is reportedly taking a big step to channel films off the Internet and onto television sets.

But Blockbuster could find it difficult to make much headway against

Apple

(AAPL) - Get Report

, which has been in the space for a year with its Apple TV.

Blockbuster is developing a service to launch later this month that will let users watch Internet-streamed movies through the company's hardware on their TVs, according to articles in

Hollywood Reporter

and

Reuters

. Blockbuster did not confirm or deny the reports, but analysts believe that it is a strong possibility.

Details on Blockbuster's box aren't available, but the device is expected to be similar to what Apple TV offers its users. However, unless Blockbuster can beat Apple on pricing, style and ease of use, it's unlikely its device will have the same cache as an Apple product, experts say.

Indeed, analysts say a big marketing campaign by Blockbuster to promote its products could have the unintended consequence of raising the profile of Apple TV and drawing more customers, who are familiar with iTunes, to get their movie rentals through Apple TV.

In addition, they say Blockbuster's audience skews toward users that like to take fewer risks than Apple's fanatical base of early adopters who are willing to experiment with new products.

"Blockbuster will try to compete with Apple TV but without a powerful partner, I'm skeptical they can convince consumers that their brand is better than Apple's," says Michael Pachter, an analyst with Wedbush Morgan, which does not own shares of Apple or have an investment banking relationship with the company.

Blockbuster is counting on its 2007 acquisition of

Movielink

, a movie downloads service. Movielink has developed a strong partnership with movie studios that Blockbuster hopes to leverage to deliver digital movie content to users.

Blockbuster could have made it easier for itself by partnering with Apple, but it would take some convincing arguments for Apple to sign on.

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"Blockbuster would have to convince Apple that it could provide a benefit through its Movielink relationships," says Pachter.

That's unlikely, because Apple has invested a great deal in making Apple TV a must for home theater.

Apple and Blockbuster are incompatible brands, says James McQuivey, principal analyst, for industry research firm Forrester. "Apple just doesn't want to tarnish its extremely high-end sophisticated brand by partnering with mainstream brand like Blockbuster," he says.

Apple TV, which was launched last year, has been described as

a "hobby"

by company CEO Steve Jobs.

The product contributes about 0.3% or 0.4% to Apple's revenue, or $100 million to $125 million annually, Shaw Wu, an analyst with independent research firm American Technology Research

said in a note

last month.

If Apple plays its cards right and adds more features to the device, it has the potential to turn into a billion-dollar business, analysts say.

Apple moved in that direction in January at the

Macworld

conference when it gave Apple TV a major facelift. It

launched new software

that would allow users to rent movies on the iTunes store directly from their TV and lowered the price of the device to $229. It also inked deal with almost all major studios to offer movie rentals starting at $2.99.

In the end, Apple TV and a Blockbuster set-top box, if it launches, could wind up appealing to different audiences, McQuivey says.

The Apple customer is younger, has more money and is more educated, while Blockbuster's audience tends to be older and less sophisticated, he says. "Apple buyers see the decision to purchase an Apple product as a style decision, while the Blockbuster crowd is about just entertainment, not lifestyle or image."

The idea of Blockbuster and Apple finding some common ground is not completely out of the picture. Consumers are still cool to the idea of a set-top box for digital movie rentals, and both Apple and Blockbuster face the problem of convincing more users to buy into the idea.

"Consumers have indicated that they don't' want a box that does just what their DVD players is doing right now," says McQuivey. "So in the end it is hard for all these companies compete with a box that costs the user just 50 bucks."

For now, though, there's time for this battle to play out and more innovation and competition in the market is likely to benefit all players, says Tavis McCourt, an analyst with Morgan Keegan. Morgan Keegan does not own shares of Apple or have an investment banking relationship with the company.

"We are still a few years before we can see how this market really plays out," says McCourt. "These are the early days and I liken it to the MP3 market in the early 90s."

Shares of Apple were down $2.42, or 1.6%, to $152.13 in recent trading. The company's stock is down nearly 22% since the beginning of the year. Shares of Blockbuster were down 8 cents, or 2.5%, to $3.17 in recent trading.