Monday, November 28, 2011, 10:07 AM ET|Posted by Will RichmondLast Wednesday, just before the Thanksgiving break, YouTube announced a deal with Walt Disney Studios which will make hundreds of new and classic movies from Disney, Pixar and DreamWorks available for rental. The Disney deal adds to the online movie rentals (or "iVOD" as this category is also known) initiative YouTube announced last May. Between the breadth of movies soon to be available, its aggressive pricing - including $.99 rentals on recently-released blockbusters, its integration in numerous connected devices and of course, its status as the online video market's 800-pound gorilla, YouTube may just have what it takes to disrupt the iVOD market, impacting the broader Hollywood and movie distribution industries.
To be sure, the iVOD market isn't very large today; last August, IHS pegged first half 2011 total iVOD revenues at just $111 million, with the top 5 players accounting for over $106 million of this. No surprise, iTunes had a dominant 65.8% market share, for about $73 million in revenues. As I wrote, relative to subscription services like Netflix, and DVD purchasing, iVOD is a rounding error. The business has been hampered by relatively high prices and restrictive playback policies (e.g. 24-hour rental period, 30-day expiration, high-prices, limited viewing environments, etc.)
Now it appears that YouTube may have what it takes to shake things up. First, and most important is a willingness to lose money on each rental. With its $.99 promotions, YouTube is taking a couple dollar loss on each $.99 rental, assuming, as Richard Greenfield at BTIG estimates, the guaranteed studio minimum is around $3 per rental. YouTube hasn't released any data on its rental volumes, but its top 10 most-popular rentals are all .$99 choices. These include recent blockbusters such as "Harry Potter and the Deathly Hallows - Part 2," "Green Lantern," and "Fast Five." By comparison, iTunes is offering HP and Lantern for $3.99 and Fast Five for $4.99 (note Amazon is more aggressive, matching Lantern at $.99, with HP for $1.99 and Fast Five for $3.99).
Pricing is obviously a huge driver of interest for consumers who are evaluating further choices like Redbox, Netflix, pay-TV VOD, Vudu, etc. If YouTube is committed to having blockbusters at below market prices and sustaining losses on them, then it is going to attract usage. While YouTube can't do anything about the restrictive playback policies, when the rental cost is less than a buck, many consumers will perceive the potential financial risk of not completing their viewing as less of an issue. Further, by making movie rentals available on Android devices too, YouTube is adding viewing flexibility, further reducing the risk of non-completion, while adding a sexy, "view anywhere" feature. If and when Android tablets gain traction, this is an important competitive lever in Google's battle against Apple and its iOS devices.
The next big question is whether selected Disney movies will also get the $.99 promotional treatment. Since many of these movies are dropping out of Netflix streaming with the upcoming expiration of its Starz deal, this would be a significant opportunity for YouTube. When combined with the proliferation of holiday season connected devices, YouTube could be able to really capitalize on the Disney deal in early '12.
YouTube's move into movie rentals and its willingness to sustain rental losses makes you wonder what its larger goals are here. To soften the ground for Google TV? To increase the tailwind for its 100 channels of new programming? To thwart Apple? Regardless, it seems to be evidence of movies being used to serve larger strategic goals, a point I raised recently in "This Holiday Season, Video Apps' Purpose is to Sell Devices." But will the studios appreciate YouTube's efforts or scorn them? After all, even as YouTube discounts blockbuster rentals, the industry is rolling out UltraViolet, intended to persuade consumers to pay more for movies in exchange for secure cloud access to them. Low-cost rentals don't exactly reinforce the message that consumers should shell out big money to build collections.
It's a confusing landscape, but one thing is for certain - if YouTube and its deep-pocketed parent Google are really committed to low-cost movie rentals, some level of disruption is highly likely.