UltraViolet, Flixster Won’t Save Movie Sales

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Here’s the reality of home video: Most people still watch DVDs and Blu-ray discs. The NPD Group’s “Entertainment Trends in America” report released in April found that consumers spend 78% of their home video budget on DVD/Blu-ray, 15% on services that offer both physical and digital options like Netflix (NASDAQ:NFLX), and 8% on purely digital services.

Great. So Sony (NYSE:SNE), News Corp. (NASDAQ:NWS), Time Warner (NYSE:TWX) and other Hollywood companies fretting about the disappearance of the disc have nothing to worry about, right?

Wrong. It’s not how consumers spend their money that matters, but how much they spend — and they aren’t spending as much. Disc-based movie sales declined 9% between March 2010 and March 2011. Sales totaled $7.8 billion last year, down drastically compared to five years ago, when they totaled $13.7 billion.

So here’s the real reality: People watch discs, but they aren’t spending very much on them, nor are they spending very much on home video at all. The hope is that UltraViolet technology and now — for Warner Bros in particular — Flixster will turn that trend around. What moviemakers and their shareholders need to understand, however, is that consumers are becoming less and less interested in ownership.

UltraViolet, for those unfamiliar, is a cloud-based digital distribution service backed by the aforementioned companies as well as Comcast (NASDAQ:CMCSA), Lionsgate (NYSE:LGF) and Viacom (NYSE:VIA). It gives consumers who buy a DVD or Blu-ray version of a movie access to a digital version of that movie, which can be downloaded repeatedly on other devices because UltraViolet stores the user’s digital rights info. The first film to use the service, Warner Bros.’ Horrible Bosses, released in October, but UltraViolet’s true juggernaut is Harry Potter & The Deathly Hallows Part 2 released Nov 11.

Warner Bros. also is in charge of the technology consumers use to get their UltraViolet movies. Flixster — formerly a social network for movie fans purchased by WB in May for $75 million — is the access point for downloading UltraViolet movies. Users open an account, giving them access to purchased movies, but also a Facebook-like profile that shows what movies they like, what they own and what else they’ve viewed through Netflix, streaming service Hulu or even Apple‘s (NASDAQ:AAPL) iTunes.

Eventually, Flixster will itself be an iTunes-style storefront, selling UltraViolet movies from all supporting studios directly, thus replacing lost DVD sales.

On a superficial level, the plan seems solid: More consumers are using digital platforms than in the past, and the kids sure like social networking — so mix it all up, and there’s a solution to lagging sales. It would seem especially attractive to Warner Bros., which currently controls 20% of the disc-based market.

However, if the current market is representative of where the home video market will be in five years, the UltraViolet coalition needs to reassess its plans. Forget the risk of tarnishing its reputation with retail partners like Best Buy (NYSE:BBY) and Wal-Mart (NYSE:WMT) by emphasizing digital sales. Consumers aren’t interested in buying movies at all.

Digital sales simply aren’t growing at a rate to match disc sales decline. While disc sales have crumbled 43% during the past five years to just $7.8 billion annually, digital sales still only represent a fraction of that revenue. Digital movie sales grew 7% year-over-year during the first three quarters of 2011 and still only came to $406 million.

Flixster, with its 1.2 million monthly visitors online, and UltraViolet might be the tools Warner Bros. and the rest of Hollywood can use to soften the blow of a desiccated DVD market, but these companies can’t rely on selling movies forever. The future at this point is in fully transforming the home video market into a primarily service-based industry — streaming or downloadable rentals supported chiefly by subscription payments rather than individual sales.

Even during its catastrophic third quarter, Netflix’s revenue totaled $822 million, more than doubling total digital movie sales revenue over a period three times as long. Hulu’s premium subscription service Hulu Plus, which has roughly 1 million subscribers, is expected to generate more than half of the company’s total estimated $500 million in annual revenue. These services are handily eclipsing digital sales. It’s the burden of movie studios to figure out how gain control of that revenue.

As of this writing, Anthony John Agnello did not own a position in any of the stocks named here. Follow him on Twitter at @ajohnagnello and become a fan of InvestorPlace on Facebook.


Article printed from InvestorPlace Media, https://investorplace.com/2011/11/ultraviolet-flixster-movie-sales-warner-bros-time-warner-twx/.

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