UltraViolet, the digital locker that has the backing of nearly every big Hollywood studio, retailer and consumer electronics manufacturer, is the culmination of three years of work from those groups trying to save a home entertainment business that today is largely defined by rapidly declining DVD sales. But despite its ambitions, there’s something about UltraViolet that seems lacking: Even if it succeeds as a platform for the sale and distribution of video to new digital devices, whatever incremental sales it brings probably won’t be enough to make up for losses on the DVD side of things.
What a long, strange trip it’s been
What the Digital Entertainment Content Ecosystem (DECE) set out to do is certainly a noble goal: It wants to give customers access to the content that they own any time and anywhere. And while it’s been slow going, there are reasons to believe that by the end of 2012, the goal of ubiquitous access might finally become a reality for the consumer.
The consortium was founded in 2008 to create a standard way for users to purchase and access digital files regardless of where they were purchased or on which device a viewer would like to watch them. To do so, the DECE came up with the idea for a “digital rights locker” where consumers could store their purchases online and view them from any digital storefront. UltraViolet, the DECE’s brand name for that format, finally launched with the release of a few movies earlier this month.
There is certainly a consumer desire for that anywhere, anytime access, and studios need to embrace ubiquity in order to compete in a world that is increasingly connected. But there is also the sense that the ability to “own” a piece of content — even one stored in the cloud —is becoming an archaic notion. What consumers seem to want is not access to everything they already own but access to as much content as possible.
Where have all the home entertainment revenues gone?
It’s not news that DVD sales — the backbone of studio home entertainment divisions — are falling quickly. And while consumers are finally starting to purchase Blu-ray discs in earnest, due to cheaper Blu-ray players and greater adoption of the higher-quality format, the increase in sales is not enough to make up for the loss of DVD dollars.
According to IHS iSuppli, DVD sales plummeted to $3.1 billion in the first half of this year, from $3.82 billion in the same six months of 2010. While spending on Blu-ray discs increased from $774 million in the first half of last year to $857 million in the same period of 2011, that wasn’t nearly enough to make up for the DVD decline: Overall disc sales fell to $3.96 billion for the first half, compared with $4.59 billion in the comparable period last year.
Nor have digital sales been able to pick up the slack over the past few years. According to the Digital Entertainment Group, digital purchases of movies were up just 4 percent in the first half of this year, to a mere $270.3 million. In comparison, digital video on demand, or online rentals, grew 4.4 percent, to $929.1 million.
UltraViolet to the rescue?
The DECE and its proponents argue that one reason digital sales are largely stagnant is that purchasing a movie online isn’t a good user experience. Users are largely tied into watching a piece of content through a single digital store, like Apple’s iTunes or Vudu. Furthermore, there’s no guarantee that they will be able to watch those digital assets on the device of their choice. UltraViolet seeks to remove those issues. By attempting to make digital ownership easy and painless — and by increasing the ubiquity of access across a multitude of devices — UltraViolet seeks to alleviate the issues that have largely held back digital purchases.
Look closely at the numbers, though, and you will see that consumers are spending on digital video, but they’re not spending to own it. They’re spending money on rentals, but the biggest point of growth in the digital home entertainment ecosystem comes from subscription video on demand (SVOD), including services like Netflix and Hulu Plus. According to the DEG, revenues at subscription rental services (both streaming and DVD) grew 46 percent in the first half of the year, to $1.56 billion. That suggests that consumers are becoming more comfortable with paying a small amount to have access to a library of movies and TV shows rather than paying a little bit more to own it. That trend seems likely to continue.
Netflix and the case for ubiquity
One could argue that Netflix’s massive growth over the past few years is due to its investment in ubiquity — that is, the user’s ability to access the service on nearly any device, whether it be a PC, a connected TV or Blu-ray player, a mobile handset, or a tablet. By being ubiquitous, Netflix has been able to provide a huge value to consumers looking to fill entertainment hours. They have no longer had to think about how they would use the service; chances are, if they have a connected device, it probably has Netflix installed or they can download an app to install it.
DECE members plan to follow the Netflix model and hope to replicate its success by being everywhere consumers are. And since Ultraviolet is expected to be supported by a number of digital storefronts, there will be multiple options for access, giving users a good deal of choice in how and where they watch a piece of content. So for instance, a user might prefer to purchase an UltraViolet title on the Vudu website but will be able to watch it through the Flixster app on his iPad.
But while UltraViolet will eventually take a big step toward overcoming some of the technical hurdles that have held back digital ownership of films, there’s also a sense that it’s already lost that fight and that whatever comes to market over the next 12 months will be too little, too late. That’s because the shift in dollars that is occurring is not from a model based on owning physical media to one based on owning digital media. It’s from an ownership model to one based on renting or subscribing to a library for access to content.
The access-ownership debate, crystallized
The debate between access and ownership was perhaps best crystallized in a keynote conversation between Mike Lang, the CEO of Miramax, and Netflix Chief Content Officer Ted Sarandos at MIPCOM in October. On the one hand, you had a studio that was trying to revive itself by striking massive deals for both physical and digital distribution, and on the other you had the representative of a company that didn’t sell content but charged a monthly fee for access to it.
“It’s interesting, the economy of access versus ownership,” Sarandos said. “My kids will pay a premium to have access to things, and very little to actually own them anymore. In their lifetime, my DVD collection has gone from the coolest thing in the world to being, ‘Why do we have these discs around the house?'”
But as seen in the numbers above, it’s not just a question of whether consumers will want to own discs in the future. In the digital arena, iTunes and other digital sales channels are massively losing ground to services like Netflix, which thrives on providing access to a library of movies instead. In other words, there’s the bigger issue of whether consumers will want to “own” digital assets as well.
Hollywood’s last best chance
“I think as an industry we have to believe [in UltraViolet]. We really don’t have a choice,” Lang said at the MIPCOM keynote. “If the home entertainment business, as far as the transactional business, goes away, that’s not good for anyone . . . in terms of the ability to finance and develop new product.”
There’s something poignant about watching Lang make this comment and knowing how true it is. DVD sales are rapidly declining, and Blu-ray is not making up the slack. Today’s electronic sell-through revenues are largely flat. The only aspect of the home entertainment market that’s growing appreciably are licensing revenues that come from subscription VOD services like Netflix.
That leaves Hollywood in a pickle: It can improve the consumer experience appreciably, but it will be difficult to bring those ownership dollars back. And as the next generation of users becomes even more comfortable with not actually owning content, the studios could have an even more difficult time creating value in the digital market. UltraViolet might be a step in the right direction, but it might not have happened quickly enough.
