Will UltraViolet be a hit with consumers? Analysts have big concerns

editor's corner

Jim-OWarner Bros. this week launched its first digital movie protected by DRM in the form of UltraViolet, the digital locker technology the movie industry is counting on to push movie sales into the cloud and, it hopes, to reinvigorate the revenue stream associated with them (see Studios betting consumers will go to the cloud for movies).

But movie sales of all kinds--DVD and electronic sell-through (EST) are struggling--so changing consumer behavior wlll be a tough sell.

This year, consumers are expected to buy an average of 6.8 movies per household, Morgan Stanley analyst Benjamin Swinburne said in a report. If UV can, as hoped, push that to seven, Hollywood studios could see a 10 percent bump in earnings. Take that to 12, the number consumers bought in 2004, and it's easy to see why the UV initiative is so critical, a key to weaning consumers away from rentals and back to purchasing movies.

But IHS Research in August said the Internet video on demand (iVOD) and EST business in the U.S. barely topped $229 million in the first half of the year and forecast the market will rise to only $487 million for the full year, numbers that didn't create much noise in Hollywood.

"In the current economic climate, consumers are more interested in accessing movies than in owning them," said Arash Amel, research director of digital media for IHS. "Because of this, growth in EST has virtually stopped."

BTIF analyst Richard Greenfield contends the launch of the UV platform already has been misplayed, given it is still lacking a standard downloadable file format and with UV having spent virtually nothing on the education of consumers.

Another major concern is the lack of participation in the platform from Apple (Nasdaq: AAPL) and Disney (NYSE: DIS), especially since Apple's iTunes has been the go-to spot for consumers looking to buy movies.

iTunes has long controlled the lion's share of the market, and its EST and iVOD dominance has continued to grow, despite the entrance of new players like Walmart's Vudu. In the first half of 2011, iTunes' share was 65.8 percent, up from 64.9 percent for the same period in 2010.

"Whatever small EST growth that is happening is coming from aggressive sales on iTunes, as well as discounting across major services," Amel said. "Much of iTunes' success can be traced to the rising usage of Apple's AirPlay system, which allows wireless video streaming to consumer electronic devices including televisions. This has expanded the reach of iTunes to new platforms, boosting sales of movies from the system."

Greenfield said not having Apple in the fold is a problem.

"With the vast majority of EST transactions occurring on the iOS platform and a high percentage of digital copy users utilizing iOS devices, eliminating iTunes and its ecosystem before the UV-ecosystem is far more robust is a mistake," he said, arguing that studios need to continue to "include iTunes and Windows Media digital tokens so that consumers are not forced to use the UV-ecosystem until there are far more ways to access, download and transfer UV-content."

He's not alone.

Swineburn worries that without Disney and Apple, universal adoption will be inhibited, especially since Disney plans to roll out its own platform "Disney Studio All Access."

The platform uses a different file format than UltraViolet's Common File Format, "making it difficult for users to keep their UltraViolet films and Disney films in the same place," he said.

UltraViolet has been a long time coming to market. Will it work?

"We are skeptical that anything can reinvigorate the purchase of home entertainment beyond drastically reducing prices points (relative to rental)," wrote Greenfield. "Forcing consumers to use your infrastructure versus the infrastructure they are comfortable with requires a ‘complete' solution, which the UltraViolet-ecosystem simply is not today."

A not-ready for primetime product, he said, is not only likely to push consumers even faster toward rentals, it could even add fuel to one fire Hollywood has so far had little success in dealing with: piracy.--Jim