Has Hollywood Given Apple Too Much Power Over Its Digital Future?

The studios are eager for Apple’s iCloud service to boost movie ownership again, but are they giving too much power to the tech giant?

With Hollywood’s help, Apple is on the verge of total domination of the digital movie market.

The company already controls 65 percent of digital movie sales, according to research by IHS Screen Digest.

Now, as it expands digital offerings into the cloud, it threatens to dwarf Hollywood’s own UltraViolet cloud initiative, with the only credible challenge coming from Amazon and Google, not the movie industry.

“If they do this right, Apple is in the lead position,” James McQuivey an analyst with of Forrester Research told TheWrap. “They’re already in a strong position. The dark horse here is Amazon, not UltraViolet.”

How did that happen?

Also read: The 'iCloud' Rolls In: Will Apple's Technology Reign Continue?

UltraViolet, backed by powerful retailers like Walmart and every major studio except for Disney, was aimed at promoting digital ownership, as opposed to the streaming or rental market dominated by Netflix or Redbox. It was also intended to prop up sagging disc sales by adding digital rights to DVDs and Blu-rays. 

But so far it has not caught on. In January, its backers announced that roughly 750,000 accounts had been set up, much fewer than analysts had anticipated. The system, some customers complained, is overly complicated.

Studios says they are working to streamline the experience and believe that once Walmart begins offering UltraViolet enhanced products through its recently announced "disc-to-digital" program, customers will catch on. Still it’s hard to escape the feeling that it debuted with a whimper, not a bang.

“Current adoption doesn't concern me,” McQuivey explained. “It’s the lack of a reason for people to adopt it in the future.”

“To be fair to them, I don’t know that they understood there would be a day where the device you bought determined which movie you bought,” he added.

This despite the fact that Apple did exactly that with MP3 music purchases.

Also read: Apple Unveils New Apple TV: High-Def, Movies From the Cloud

Mark Teitell, general manager and executive director of DECE, the studio UltraViolet collective, maintains that consumers value interoperability in cloud services — and said research shows that they want multiple cloud-based services to choose from. 

"Market dynamics show that consumers want to use multiple services as they are increasingly accessing video entertainment from multiple cloud-based services and devices and therefore seeking interoperability," Teitell told TheWrap. 

He suggested that growing number of cloud services is increasing consumer awareness about how they work. Apple's move into the market will surely increase it even further.

The tech giant already controls a huge chunk of market share due to its popular iTunes store and dominates the tablet market with the iPad. Extending that reach into the cloud is a natural move for the tech giant.

Hollywood will be hard-pressed to compete with the Cupertino, Calif.-based company, which has convinced consumers its goods are must-haves. And that’s without the Apple TV set reportedly in the works.

“I’m sure studios are not thrilled with the power that iTunes now has to dictate prices or with the lower margins they get on digital sales,” Michael Yoshikami, CEO and founder of Destination Wealth Management, told TheWrap. “But they have to embrace the lower margin model because if they don’t adapt, there will be no margin at all. All the digital movies will just be pirated.”

Also read: Walmart Supports UltraViolet With 'Disc-to-Digital' Service

True to form, Apple is keeping the walls of its ecosystem firmly in place by making sure that the movies kept in its cloud are only accessible on its own devices. It will not offer UltraViolet purchases on its iTunes store.

“The studios fondest wish is that iTunes comes on board and becomes an UltraViolet licensee and starts providing stuff that is compatible with what everyone else is selling,” Tom Adams, principal analyst and director of U.S. media for IHS Screen Digest, told TheWrap.

For now, the studios don’t seem to mind that Apple may cannibalize its own cloud project. Sony, Disney, Lionsgate, Warner Bros and Paramount have reached agreements with Apple. Fox and Universal are expected to follow suit in the next few months once they renegotiate licensing deals with HBO that are preventing them from releasing their films to the cloud, according to an individual with knowledge of the talks. 

Also read: UltraViolet Backers Get Ready to Make More Noise in 2012

With Apple’s help, studios hope they will have the firepower needed to lure consumers into once again building video collections, this time in the cloud, just as they once had DVD libraries in their homes.

“The digital sell-through model is a key part of our focus this year and Apple is such a big part of that,” one studio executive told TheWrap. “The business wasn’t really there before.”

The truth is that even though studios make the movies and television shows that people want to see, they need Apple as much as it needs them. 

Total consumer spending on Blu-ray and DVDs slipped more than 13 percent last year to $8.95 billion, down from  $10.52 billion in 2010, according to the Digital Entertainment Group.

The damage was offset by the growth in the digital delivery sector, which saw sales rise 51 percent to $3.42 billion, up from $2.26 billion in 2010, but that growth is not big enough to staunch the bleeding in the DVD market. That won’t happen unless iTunes purchases move into the cloud.

But there is a real danger in putting too much power in Apple’s hands, as the music industry found out the hard way.