Apple (down $0.78 to $135.93, Charts, Fortune 500) is believed to be working towards starting the new service some time in the fall which would offer a 30-day rental for $2.99, according to the Financial Times.
A deal would allow iPod users to watch movies during the rental period without purchasing the entire film, which could be a very popular service for the millions of users of the video-enabled version of the device.
iTunes rentals could mount a serious challenge to cable and satellite TV providers who are working on offering a large library of on-demand films from the major studios, said the report.
Video on demand has been lucrative so far for cable companies like Comcast (Charts) and satellite operators like DirecTV (Charts, Fortune 500), but none of the cable operators has as many customers as Apple does.
Rights management software would allow the movies to be viewed on an iPod or iPhone, but would prevent them from being copied, according to Financial Times.
Apple already sells films online, including titles by Walt Disney and Paramount. But the number of films available on iTunes is still small compared to the number of titles available on DVD.
The major studios, including Sony (Charts), News Corp.'s (Charts) 20th Century Fox, Viacom's (Charts, Fortune 500) Paramount, Metro-Goldwyn-Mayer, Time Warner's (Charts, Fortune 500) Warner Bros and Disney (Charts, Fortune 500) declined to comment on the report, according to FT.