The cloud goes Hollywood

February 3, 2012: 5:00 AM ET

The major film studios think they've found a way to sell and deliver movies online. Will consumers buy it?

By Robert Levine, contributor

FORTUNE -- Consumers who recently purchased Warner Brothers' final Harry Potter film on DVD or Blu-ray found a surprise in the package: a digital copy of the movie in the new UltraViolet format. Although the name is not yet familiar, UltraViolet represents Hollywood's first step into the cloud -- the much-hyped idea that media will be stored on remote servers and accessed by various devices.

The idea behind UltraViolet is simple: The format allows buyers to own rights to films, which they can store in a "digital locker" and access via various Internet services. It's potentially a huge convenience for consumers, who now have a dizzying number of devices (phones, tablets, computers) on which they can watch video content, and indeed, some 750,000 households in the U.S. and Britain have set up UltraViolet accounts, its backers say.

For the studios the stakes are high: DVD sales, which peaked at $15.5 billion in 2004, have stalled as consumers have turned to streaming services such as Netflix (NFLX) or, worse, illegal downloads. The studios that have announced releases in the UltraViolet format (Fox is expected to announce soon; Disney (DIS) remains a holdout) believe UltraViolet will help goose home video sales by enabling consumers to build a remotely stored library of movies. "We know consumers like collecting movies," says Mitch Singer, president of the Digital Entertainment Content Ecosystem, the consortium that controls UltraViolet.

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The consortium believes the UltraViolet format addresses industry and consumer concerns around compatibility and piracy. Working with tech company Neustar (NSR) the group developed a system that operates more like an entertainment ATM. When users sign in, it queries a central database to see what movies they have rights to watch -- much as an ATM checks how much money cardholders can withdraw.

The format isn't without its challenges. Setting up a digital locker takes time. Customers must first create an UltraViolet account; then, to watch movies online, they sign in to Flixster, a movie site operated by Warner Bros., which like Fortune, is a unit of Time Warner (TWX). (Other UltraViolet movie-viewing sites will debut this year.)

But the biggest hurdle could be competition from technology companies such as Apple (AAPL), which has its own iTunes ecosystem for movies. Amazon (AMZN), on the other hand, has signed a deal with one studio, which it didn't name, to sell UltraViolet films.

Despite the challenges, studio executives are bullish on the format. For the first time they're able to offer on-demand video on multiple screens, and may even outfox pirates. Talk about a Hollywood ending.

Robert Levine is author of Free Ride: How Digital Parasites Are Destroying the Culture Business and How the Culture Business Can Fight Back

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