On UltraViolet, Consumers Seen Balking at Hefty Fees For Discs They Already Own

Despite a “rocky start and limited retailer support,” UltraViolet is the “single most important strategic initiative for film studios in 2012,” said a report on convergence released Monday from Equity Research. That comes on the eve of Walmart’s expected announcement Tuesday that its Vudu service will become the second online destination, after Flixster, for accessing UV files. Movie studios “continue to grapple” with declines in their largest revenue source -- home entertainment -- as growth in Blu-ray and digital have not offset a decline in DVD sales, at the same time consumers are transitioning from purchases to rental, the Equity report said.

According to BTIG analyst Richard Greenfield in a blog post Monday, Walmart will become the first retailer to enable consumers to bring existing DVDs into their stores and receive digital copies of those movies in their UV locker. It was unclear whether Vudu will be selling standalone UV versions of movies or be an access point for the UV-copy included with certain DVD/Blu-ray movies purchased by consumers, which is the model Flixster uses, Greenfield said. The hope is that UV offers studios a way to make “new” money on the 10 billion existing DVD and Blu ray discs owned by U.S. consumers to help offset the decline in physical and digital home entertainment sales, which Greenfield said were down 12 percent in 2011.

Despite studios’ wishes to get consumers to build digital collections from their Blu-ray and DVD collections and create additional revenue, “it would be extremely difficult to encourage consumers to buy movies in the future,” Greenfield said, due to the vast amount of content available for rent. At “the click of a button,” consumers can easily snatch content from rental providers including Amazon, iTunes and Vudu or via subscription packages including HBOGO, Showtime Anytime, Netflix and Amazon Prime, he said.

Both analysts cited challenges facing movie sales, including windowing and price. “Consumers might buy movies at $20-$30 day-and-date with theatrical release or at worst a few weeks afterwards,” Greenfield said, “but forcing them to wait 4 months and then trying to charge $20 or more seems unrealistic."

Equity Research calls UltraViolet’s value proposition as a cloud-based digital library fundamentally “sound and good.” But in order for UV to be successful, it said studios should cut the wholesale price of movies for electronic sell-through to boost retailer interest, drop electronic sell-through prices while raising rental fees, create an early UV sales window ahead of physical sales while pushing back the rental window and resolve the HBO blackout issue where HBO content isn’t viewable online when it’s inside the pay TV window. Studios could reach a breakeven point or better by following the suggested changes “if the window and pricing tactics drive higher electronic sell-through transactions to offset lower digital rental revenue,” Equity said. “We are still optimistic about UV’s prospects,” it said, despite the sluggish start and lack of retailer support.

Regarding Equity’s recommendations, a spokeswoman for UltraViolet wouldn’t comment on pricing “as it is up to content providers and retailers to determine the retail price for UltraViolet titles.” But, she said, “we believe UltraViolet provides substantially more value than today’s marketplace offerings.” While she wouldn’t comment on speculation about Walmart’s announcement tomorrow, she said “we can say that Walmart/Vudu is a member of DECE,” the consortium powering UltraViolet. Amazon announced at UltraViolet’s 2012 CES press event that it had signed an agreement with an unnamed studio to include UltraViolet rights when selling titles to consumers, but she said no further details were available.