Wall Street Analysts' Outlook for UltraViolet Is Mixed

NEW YORK - With Warner Bros.' home entertainment release of Horrible Bosses Tuesday, Hollywood studios and tech firms kicked off their long-discussed UltraViolet platform, which allows consumers access to movies they own across a slew of devices via a digital locker.

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Wall Street analysts on Tuesday mentioned opportunities of the cloud storage system, particularly for revitalizing the Hollywood studios' home entertainment business, but also highlighted its current shortfalls, particularly a lack of participation from Walt Disney and Apple.

"Can UltraViolet Shine A Light on Owning Movies Again?" Morgan Stanley analyst Benjamin Swinburne asked in a report. "We view the industry's UltraViolet initiative as a critical, although certainly challenging, step forward given the potential for greater adoption of high-margin electronic sell-through and slowing the consumer migration away from purchase transactions toward lower-margin rental outlets," he said. "If UltraViolet can drive consumers to adopt a cloud-based film ownership model in any material way, stocks that have material studio assets would likely see higher earnings and multiple expansion."

In a bull case scenario that he outlined, UltraViolet could drive about 10 percent upside to film studios' earnings before interest, taxes, depreciation and amortization. In that scenario, films bought rather than rented per household could rise to more than seven per year by 2015 from an estimated 6.8 this year. "If UltraViolet is able to drive film buying habits back to 2004 levels - at over 12 films purchased per household annually - the upside would be even greater," Swinburne said.

But the analyst also highlighted key challenges. "Disney and Apple remain on the sidelines, inhibiting universal adoption," Swinburne said. "Disney currently plans to launch its own version of a “digital locker” called Disney Studio All Access that uses a different file format than UltraViolet’s Common File Format, making it difficult for users to keep their UltraViolet films and Disney films in the same place."

For now, it is early days, with the start of 2012 potentially bringing another incentive for consumers. "We expect legal-copy upload capability (allowing consumers to upload current DVD inventory into the cloud) to begin rolling out by the first quarter 2012, potentially spurring new purchase activity," Swinburne said.

Miller Tabak analyst David Joyce also said it was too early to predict the impact of UltraViolet. "The big question is how does the consumer like whatever price points emerge and how cannibalistic might it become for future platform releases and growth," he told The Hollywood Reporter.

"I am hopeful that the risk and opportunity will be balanced" though, he added. The key question will be whether a studio will be able to charge a higher price of, say, $30 now for a consumer to have access to a piece of content in perpetuity instead of getting less money plus another $20 five years from now for a new device.

While lauding studios for looking at digital options, BTIG analyst Richard Greenfield was particularly bearish about UltraViolet, highlighting that it doesn't work with iTunes and doesn't easily work with Apple devices.
 
"While we are skeptical that anything can reinvigorate the purchase of home entertainment beyond drastically reducing prices points (relative to rental), forcing consumers to use your infrastructure versus the infrastructure they are comfortable with requires a “complete” solution, which the UltraViolet-ecosystem simply is not today," he said in a blog post. "Moving forward with UltraViolet before it is ready for prime-time risks pushing consumers increasingly toward rental priced options where they do not need to deal with the hassles of ownership and, even worse, piracy."