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As UltraViolet Fades, Studios Ponder Options

In hindsight, it was probably an impossible task: Getting major Hollywood studios, technology companies and retailers to agree on a way to sell movies that consumers could watch on lots of devices. And three years after just such an initiative launched, a reaction to the dominance of Apple’s iTunes, its time may be running out.

Known as UltraViolet, the venture is backed by most of the major studios but has so far failed to persuade big digital retailers to work with it. As a result, entertainment executives say they no longer see UltraViolet as the only path to a system where consumers can buy movies from any outlet and play them on any device. Studios backing Ultraviolet have had discussions about joining forces with Walt Disney, the one major studio which stayed out of Ultraviolet and created a rival service called Disney Movies Anywhere.

The Takeaway
Major Hollywood studios’ digital sales venture UltraViolet has failed to gain acceptance among major digital retailers. As a result, studios have talked about joining forces with a rival effort run by Walt Disney.

Disney’s own service has a leg up over UltraViolet by being compatible with Apple’s iTunes and Google Play, as well as others like Wal-Mart’s Vudu. UltraViolet, on the other hand, works with Wal-Mart’s Vudu and Target and an array of smaller outlets but not Google, Amazon or Apple, long the biggest seller of digital movies.

UltraViolet is continuing to try and win over those outlets but getting companies like Apple on board is challenging, given that the whole idea behind UltraViolet is to make it easier for consumers to buy from any retailer. Disney’s success highlights both the strength of its brand name with consumers and longstanding ties to Apple.

To be sure, for Ultraviolet’s studio backers, striking a deal to join forces with Disney is likely to be complicated, if only because of the large number of companies involved. It’s also unclear what will happen to UltraViolet itself if the studios go a different direction, including whether the technologies underlying the two services could be stitched together. UltraViolet has more than 21 million household accounts globally—well below iTunes’ 500 million-plus customers—and while it’s unclear how many of those are actively used, abandoning the service completely risks alienating consumers who have started to use it.

At stake is Hollywood’s ability to keep making billions of dollars from selling individual copies of movies, an enormously important revenue source for the studios since the DVD was introduced in the 1990s. But the market has been in decline for the past seven years, initially because low-priced DVD rental services started to eat into DVD sales. Then streaming services made it worse. The dollar value of DVD and Blu-ray sales has declined by more than half since 2006 to $6.9 billion in 2014, according to the Digital Entertainment Group. Digital sales totalled $1.5 billion last year.

Studios thought that creating a cloud-based movie library for consumers, who could use it as an alternative to keeping DVDs on a shelf, could make ownership more appealing. Companies like Apple offer what UltraViolet is essentially trying to accomplish: people can store movies in Apple’s iCloud and watch on any Apple device. But movies bought on iTunes can only be watched on Apple devices, like an iPad. And letting Apple dominate the market for digital sales of movies, as it did when UltraViolet launched, would leave Hollywood vulnerable to being squeezed on pricing.

Apple’s market share has dropped sharply in the past few years, as other digital outlets have grown, such as Comcast’s pay TV movie-purchasing service . Comcast’s service, though, doesn’t work with Ultraviolet either.

The studios “need a competitive landscape of digital retailers and the only way to get that is through interoperability,” where movies bought on one retailer’s service can be viewed on another’s, says Adam Johnson, CEO of Toggle, a startup that sells a dongle called Toggle TV used on UltraViolet services. Otherwise a new retailer can come along creating a better experience, but the consumer won’t switch because their previously acquired movies are stuck on another service.

To build UltraViolet, an array of studios, including Sony Pictures, Warner Bros., 20th Century Fox, Universal Pictures and Paramount Pictures took ownership stakes in a consortium called DECE with an array of technology companies. Wal-Mart’s Vudu was an early partner. Involving big DVD retailers like Wal-Mart is important for the studios because DVD sales remain a big revenue source.

But from the start, UltraViolet faced challenges. The sheer number of companies involved complicated decision-making. And because Ultraviolet was adding a layer of technology on top of retailer web sites where consumers actually buy the movie, it was clunky to use. Consumers had to create a username and password twice, for instance.

Retailers that agreed to join the consortium to sell films that would work on UltraViolet had to agree to use a common file format used by the service, even when they used alternatives.

And features like letting consumers transfer DVD collections to digital, didn’t work well when staff at retail stores charged with implementing the features didn’t know how to use it, said one industry executive.

The studios “need a competitive landscape of digital retailers and the only way to get that is through interoperability.”

It didn’t help that studios didn’t pursue a big marketing push to explain UltraViolet, notes entertainment industry analyst Tom Adams, who runs a firm that bears his name.

UltraViolet general manager Mark Teitell acknowledges that initially there were “some blemishes on the experience and it was a little bit cumbersome to create an account.” He says, though, that these issues have been resolved. Consumers no longer have to set up two separate accounts, and UltraViolet has eliminated some of the technological requirements for retailers such as the common-file format mandate.

“We have now a second gen UltraViolet out there which is more mature, more streamlined,” Mr. Teitell said.

Whether those changes draw in big digital retailers in coming months will likely determine whether studios stick with it. So far, aside from Vudu and Target, UltraViolet can only be used in the U.S. with movies purchased on tiny digital-movie retailers like CinemaNow and Barnes & Noble’s Nook.

The End of Ownership?

Another challenge for UltraViolet is pricing: New release movies typically retail for $15 or more, compared with $5 to $6 for rental on-demand.

While the difference has been an issue in the DVD market as well, some in Hollywood see it as a bigger problem when consumers are buying a digital file with fewer extras than come with a DVD or Blu-ray disk.

Hollywood executives acknowledge the problem, but they fret about how to drop the price without cannibalizing the still-important DVD market and alienating brick and mortar retailers.

The biggest challenge the studios may face, however, is that even a well-oiled digital machine might not have been able to preserve the sales market for movies. After all, the idea of buying lots of movies to own is a relatively recent phenomenon, dating to around 2000 when the studios cut DVD prices. Before that, only the most popular movies sold well, according to Mr. Adams.

With the slump in sales, the market has now returned to those days, he adds. And “the electronic market mirrors the disk market in terms of what sells.”

Martin Peers is the managing editor of The Information, where he has worked since 2014. He previously worked for The Wall Street Journal and Daily Variety, among other publications. He is based in New York and is on Twitter @mvpeers.