Hollywood's First Digital Christmas to Cause Pain

In the new weekly magazine, The Hollywood Reporter looks at studios bracing for the shift from DVDs to cheaper movies in the cloud as they fight to own their digital future.

Disney distribution president Bob Chapek calls it the "digital Trojan horse." He's referring to "combo packs," which are how most big movies will be sold on home video this holiday season. Blu-ray Discs will come with a digital file that buyers can register on one of two new services: UltraViolet and Disney Studio All Access Keychest. These free accounts will exist on cloud-based computer servers available anytime, anywhere, on any enabled device.

The move, say studio insiders, is the most serious effort yet to wean consumers away from the DVD, which has dominated home entertainment for nearly 15 years. "The evolution from a physical disc-based business to a digitally based business is inevitable," says Chapek. "I think the only debate is the period of time over which that will happen."

The big question is: How much pain will the transition inflict on Hollywood? Studios already are enduring wrenching change as DVD sales dwindle faster than digital revenue rises. A year ago, Sony eliminated about 450 positions, mostly in home entertainment, while in recent months Disney dropped close to 200 jobs, Warner Bros. cut 50, Fox trimmed 22, and Lionsgate laid off 10.

Windfalls from DVD sales powered explosive Hollywood growth during the 2000s, but the industry has realized -- as difficult as it might be -- that it must turn its back on the dying format if it aims to compete in a digital world. "This is very disruptive to studios," admits Mitch Singer, president of Digital Entertainment Content Ecosystem (DECE) and Sony's chief technology officer. "But it's better we disrupt ourselves than allow a third party to disrupt us for their financial gain."

The studios see DVDs phasing out slowly but believe Blu-ray will remain part of the mix because it still offers the best picture on big-screen TVs and can deliver 3D images. Blu-ray sales (movies, TV shows, games) were up nearly 10 percent in 2010 over 2009, according to the industry-backed Digital Entertainment Group.

Still, the message this holiday season will be that cloud-based movies are safer and more convenient -- no more damaged discs or hard-drive crashes. Most people will get the digital copy along with a Blu-ray Disc at a price suggested to be about $35, though that will be heavily discounted by retailers. (A DVD typically sells for about $5 less than a Blu-ray copy.) Digital files alone should sell for about $15 to be competitive with iTunes.

Jim Noonan, senior vp worldwide strategic promotions and communications at Warner Bros., uses the hit drama The Blind Side to illustrate the pitch: "You bought it and you've been meaning to watch it, but you haven't been able to find the two hours to set aside. Now, all of a sudden, you are at a two-hour layover in Dallas where there's Wi-Fi in the airport. Because you have access to a digital copy on your laptop, enjoy the movie right there at the airport. That changes the whole proposition of the value of ownership."

But some doubt whether consumers trained to value physical discs will be willing to switch to the cloud. "There's something to be said for just taking the DVD out of the little holder and slipping it immediately into your player, as compared to waiting for the cloud to show up, logging in, watching the bar on your screen or whatever," says Wall Street analyst Harold Vogel.

Aside from accessibility and ease of use, the burning issue for consumers is fear of a format war. That's why more than 70 studios, manufacturers and retailers have created DECE, which is about to launch the industry-wide UltraViolet format.

But the message will be mixed because Disney has a competing system, Disney All-Access, which includes a "Keychest" digital storage locker in the cloud. Disney insists its service will complement UltraViolet. "It's not our goal to create a format war," Disney CEO Robert Iger has said.

However, at least initially, buyers of UltraViolet system movies from Warner Bros., Universal, Sony and others won't be able to store Disney movies in the same account.

Disney believes its proprietary technology is simpler and easier for consumers to use. "They are creating a format for 70 companies that have to agree on usage rules, digital rights, management rules," says Chapek. "They create interoperability by creating a format. We do it by a handshake in the cloud between platforms and devices."

Retailers are bracing for the shift, expecting to sell fewer DVD players and discs. But many believe the momentum behind cloud-based movies will cause a boom in sales of digital files, as well as flat-screen TVs, tablet computers and other devices.

"Cloud locker storage -- whether it's UltraViolet, Amazon, wherever adoption goes -- is going to be incredibly popular," predicts DEG executive director Amy Jo Smith. "For the first time, you will be able to move content around to a variety of devices and platforms. I think as we move into 2012 and 2013, we will really see this take off."

That's what the studios will be selling this Christmas, as the DVD begins its ride into the sunset.