Ultra Violet or Ultra Flop?

By Tom Gibbs - August 6, 2012 | Tickers: AMZN, AAPL, CSTR, NFLX, WMT | 0 Comments

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With the explosion in the number of ways individuals can view digital video content online – a Netflix (NASDAQ: NFLX) monthly streaming account, Amazon.com’s (NASDAQ: AMZN) Instant Video streaming, Apple (NASDAQ: AAPL) iTunes movie rentals/purchases, the list goes on – the major movie studios have quickly been pushed to an unattractive position in the industry’s distribution chain.  Prior to these very recent innovations (we somehow lived through the inconvenience), studios oversaw a very tight control over content as it was passed from the nationwide base of theaters to pay-per-view services of cable providers, and finally into the retail chain with the physical DVD/Blu-ray discs. 

The studio’s latest attempt to gain some footing in the rise of the popularity and convenience of digital streaming, their relatively new UltraViolet tool, is definitely not the solution consumers have been seeking. 

UltraViolet is backed by an alliance of 70+ influential players in the content and consumer electronics industry, including five of the six large movie studios – Universal, Paramount, Fox, Sony Pictures, and Warner Brothers.  Likewise, the process behind the enjoyment of digital content is relatively simple.  Consumers that purchase a movie or TV show from their local retailer are given the rights to add the content to their digital UltraViolet library found at www.uvvu.com.  Because all of the content is stored by the studios in their cloud, the videos can be streamed locally on the computer, they can be played across a number of devices (smartphones/tablets/laptops) wherever internet connection is available, and the files can be downloaded to individual computers for play when an internet connection does not exist. 

Less-Than-Enthusiastic Reception

To date, Hollywood’s UltraViolet initiative has only registered slightly more than 1 million active users, and two extremely influential players, Disney and Apple, have yet to jump on board the alliance.  The initiative’s recent announcement of a pairing with Wal-Mart (NYSE: WMT), however, gives the studios access to millions of additional consumers that they desperately need to significantly improve the relevancy of the UltraViolet tool. 

Wal-Mart is expected to post a press release today with more information on the establishment of the joint effort – here is what is currently known:

• Consumers can bring their current disc library to Wal-Mart stores and purchase access to digital copies of the films/TV shows in the UltraViolet cloud portfolio.   Purchases will cost consumers between $2 and $4 depending on what video quality is chosen. 
• The consumers’ discs will be stamped at the Wal-Mart locations so digital access will not be granted to multiple users per disc. 
• Wal-Mart stores will install the necessary infrastructure to the photo-printing area in (most?) store locations, and will also kick in a $30 million cash infusion to co-market the initiative to the American public. 

Although the studios desperately needed a retail connection point to get access to the general public – up until now the largest player was Amazon’s retail support for Warner Bros. films – the UltraViolet initiative exemplifies the huge disconnect Hollywood still has with its target consumer base.  With so many different video-streaming options now available to consumers, and with even more coming to market in the way of Comcast, the Redbox (NASDAQ: CSTR)/Verizon joint venture, and even Intel’s new TV initiative, many consumers are having an increasingly difficult time in choosing which option is best for their viewing needs.  The primary reason why the UltraViolet system will not be among consumers’ first choice of streaming options is cost. 

The major movie studios’ primary goal has always been the boosting of demand for DVD/Blu-ray discs, for the simple reason that revenues from disc sales drastically outweigh the revenue streams studios receive when local movie rental chains lend the films to consumers.  In chasing this increasingly unrealistic dream (who wants physical copies when they are no longer necessary?), however, the studios have only further alienated movie-watching consumers.  The UltraViolet system makes it a requirement that consumers first purchase the actual copy of the film/TV show before access to a digital copy via the studios’ cloud is available.  Within the Wal-Mart deal, consumers, who already purchased the physical disc, will need to shell out another several dollars in order to gain access to their film in digital format.  For consumers who own large film libraries, the costs of digitizing the collection will be extremely unrealistic. 

The set-up is extremely ideal for the studios, as it literally costs pennies for them to store movies in their cloud system, and another several pennies to push the digital content to the content providers.  Consumers paying a minimum of $2 to gain access to their film in the cloud will end up paying a multiple of between 30-40x what it costs the studios to store and feed the content.  The $2-$4 costs are also for films that have been previously purchased and do not include the more expensive new releases that studios are hoping consumers purchase. 

This would be acceptable to consumers if they were oblivious to this fact, however.  Very few consumers will find their end of the deal very equitable when they can avoid the large fixed cost (the buying of the physical disc at the store) and simply maintain a variable movie-watching cost structure with the renting of individual movies from one of the many other sources available. 

Another potential issue with consumers is convenience.  With other such choices, including Amazon’s Cloud Drive, an Apple iTunes/Apple TV combination, or Google Play, consumers can store all of their content – whether it is movies, images, music, e-books – in one convenient place and access that content on any device, any time, anywhere.  The UltraViolet system requires multiple accounts on multiple websites, and is simply another place consumers will need to travel to access their owned content.

It is very difficult to believe that the UltraViolet system, when compared to the many other less costly and more convenient routes to digital consumption that are available, will gain a disproportionate amount of support from consumers.  Investors must also keep in mind that the initiative is not risk free for Wal-Mart, as the studios are not simply using the retailing behemoth to increase their reach to end consumers.  Wal-Mart will need to install the necessary equipment to scan consumers’ discs for legitimacy and to provide the digital access codes, it will need to train its employees on the ins-and-outs of the system, and it is has already committed at least $30 million in the way of marketing fees.  There will, of course, be quite a few people that will be initially attracted to UltraViolet based on the sheer numbers of consumers that frequently shop at Wal-Mart.  However, the system hardly makes the purchase of newly released DVDs and Blu-ray discs a more attractive option, and envisioning consumers digitizing a considerable portion of their existing film collections through the Wal-Mart system is unrealistic. 

The pricing metrics, the convenience factor, and the requirement that consumers repurchase their already owned content shows that Hollywood studios are still extremely out of touch with their core consumer base.  The inclusion of Wal-Mart into the system may act to boost marginal acceptance of the UltraViolet tool, but it will hardly be a long-term and successful player in the swiftly evolving world of digital consumption and Cloud distribution.

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