Just five years ago, Hollywood studios were flush with cash. Thanks to booming DVD sales, there was a spike in film productions. Even box office flops would make the studios money when they were released on DVD. But times have changed.
DVDs used to generate more than $20 billion in revenue a year, but since 2006 sales have fallen by more than $6 billion. This has led directly to fewer movies being made. In 2006, the members of the Motion Picture Association of America released 204 films. By 2010, that had dwindled to only 141 movies.
What Hollywood would like to see happen is to have consumers now buy movies digitally online. But that is not occurring. Consumers want access to films, but without owning them. Consumers just rent the films they want to see. So Hollywood has launched a new initiative which it hopes will bring it back to the glory days of DVDs, which had a 65 percent profit margin.
This initiative was launched in the fall by most of the big studios, including Universal Pictures, Paramount Pictures, Warner Brothers and Sony Pictures. It is a cloud-based “rights locker” and authentication system called "Ultraviolet."
It has the backing of retailers such as Best Buy (NYSE:BBY), technology companies including Intel (NASDAQ:INTC) and Cisco Systems (NASDAQ:CSCO), and phone makers like Nokia (NYSE:NOK) and Motorola Mobility (NYSE:MMI). However, notable by their absence are Disney (NYSE:DIS) and Apple (NASDAQ:AAPL) -- both companies are working on their own cloud-based rights lockers.
The Hollywood studios are convinced Ultraviolet will take off. They believe that cloud-based streaming is more appealing than downloading and storing movies on a hard disc, because video files take up a lot of space. Ultraviolet will give consumers their own rights locker. Buying a film online will give the consumer the right to stream it from the cloud to any device they wish, including a smartphone, a tablet, a PC or an internet-enabled TV.
The profit margin is even better than with DVDs, since there are no manufacturing costs and little distribution costs. But will consumers like Ultraviolet?
Unfortunately for Hollywood and Ultraviolet, things have changed radically in the past five years. There is mounting evidence that retailers are giving up on selling movie downloads. Globally, more than 30 online retailers have entirely stopped selling films online.
It seems in a digital world that consumers want to rent, not buy, films. In other words, with so many ways to access movie content, why would anyone ever need to actually own a movie? Buying a digital copy of a film at $15 is simply expensive when it can be rented for $3 or $4, especially since many consumers only watch a movie once. Perhaps Hollywood studios should consider price cuts. Studios may also want to consider releasing their films "for purchase only" several weeks ahead of their release for rental.
These changes may help Ultraviolet, but the odds still favor the movie online rental companies for now. But of course, you still have to treat the customers who rent films well. Just ask Netflix (NASDAQ:NFLX), which offers an unlimited mix of old and new films to rent online for a monthly fee.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.