NEWS ANALYSIS: Digital Turning UltraViolet

25 Jun, 2012 By: Stephanie Prange

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The buy once, play anywhere service mounted a reboot of electronic sellthrough as Netflix’s rental model lost some favor with Wall Street

“Content is king,” goes the oft-quoted saying in the entertainment industry.

But for a time there, low-cost and free Internet services such as Netflix and Hulu tarnished the crown — and sent the studios into a tizzy — by pitching content on the cheap to bolster their footprint in the market.

Well, the crown has regained its luster, and the king is back on the throne.

Studios mounted a reboot of the languishing, but profitable, electronic sellthrough business with the cloud-based UltraViolet ecosystem, thereby gaining an important foothold in the digital distribution arena.

Meanwhile, Netflix’s low-priced subscription streaming rental business lost favor with Wall Street. CEO Reed Hastings unveiled an ill-received price increase and quickly rescinded a split of the company into streaming and disc businesses after a subscriber outcry.

“In our view, the company’s business model was broken when it raised prices [in September 2011] for its hybrid [disc and streaming] customers,” Wedbush Securities analyst Michael Pachter wrote in a note.

Broken.

Netflix, once hailed as the future of content distribution, took a big hit. The stock dropped, and Wall Street began to notice that Netflix’s sweet deals with content owners during the early days of streaming were a thing of the past. Netflix was going to have to pay more for content, and in fact chose to lose some premium content from Starz early this year rather than pay a higher price.

“[We] think that the loss of the Starz feature films severely impacts product quality,” Pachter wrote of Netflix.

Meanwhile, the EST business, which had been registering barely a blip in revenue compared with the rental and physical sellthrough businesses, got a new lease on life with UltraViolet, the cloud-based digital rights locker backed by the Digital Entertainment Content Ecosystem (DECE) consortium. The rights system is designed to allow consumers to buy a title once and play it digitally anywhere, on any device — a mobile phone, a computer, a connected Blu-ray player or a game system.

DECE gathered more than 75 member companies, including five of the six major studios headed by Warner Bros. and Sony Pictures.

Sony Pictures Home Entertainment president David Bishop summed it up.

“The UltraViolet business model was built to make ownership easier,” he said at January’s Consumer Electronics Show in Las Vegas.

The October 2011 UltraViolet launch wasn’t without missteps, as consumer press noted grumbling from users who experienced technical hiccups. The industry acknowledged the difficulties, but forged ahead sure that the ecosystem would grow.

“We built a great house, and we were so excited to move in, but we found out some of the kitchen cabinets weren’t done,” said Mitch Singer, president of DECE, in addressing the problems at launch. “But that foundation is solid.”

In April, UltraViolet got a major shot in the arm with the launch of Walmart’s disc-to-digital program, which allows consumers to bring in their discs and pay $2 or $5 to obtain rights to digital copies playable on the retailer’s Vudu online service.

The bow of the Walmart service pushed UltraViolet accounts from 1 million to 2 million in a month. The service in June reached 3 million accounts and 6,000 titles.

Ownership mounted a comeback.

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