New iTunes Features Aim To Outdo DVD

Some of the coolest so-called “extras” embedded only on the iTunes’ version of several recent film releases from Sony (NYSE: SNE) Pictures aren’t even mentioned in their promotional materials. That’s because Sony Pictures Home Entertainment is quietly testing new features with an eye on a future in which digital distribution offers a more compelling product than physical discs.

Buy the Will Ferrell comedy The Other Guys and you’ll notice three extras that can’t be found on DVD or any other digital platform. A search button allows you to input a word, and any mention of it in the script will be retrieved along with a link to the exact moment in the movie in which the line was uttered. A “clip & share” function lets the viewer take select scenes and post them to social networks. There’s also a playlist with songs from the film, which are linked to to places on iTunes where those songs can be purchased. The same features are also found on Sony’s Salt and Resident Evil: Afterlife.

Mind-blowing add-ons? No, but they do represent the intent of studios like Sony, which declined comment, to offer differentiating value on digital platforms from that on DVD, where extras are often nothing more than a collection of additional short videos. When Apple (NSDQ: AAPL) launched iTunes Extras in September 2009, all it was really doing was matching the ability of DVDs to embed companion video. The goal now is to exceed what DVD can offer with a true interactivity discs can’t offer (though Blu-Ray can already do more than DVD via Internet-connected players).

That these features are available only to those who buy Guys, not rent, should come as no surprise. Studios like Sony want to make the case that ownership of digital copies of movies and TV programming is worth consumers’ dollars. They’ve found more success to date on the rental front, where services like Netflix (NSDQ: NFLX) have shone. But the electronic sell-through market is a tougher nut to crack, as a recent Gleacher & Co. estimate noted. Analyst Brian Marshall projected that rentals accounted for three-quarters of the $71 million in movie transactions iTunes may have generated in 4Q 2010. He indicated an even greater disparity on the TV side, where he projected one purchase for every nine rentals made.

It’s not difficult to see why that is. Besides the fact that rental prices are dramatically lower than that of purchases, there seems little current incentive to own something that isn’t like the tangible DVD a consumer can store proudly on a shelf. In the absence of the kind of viable digital-locker technology like the Ultraviolet initiative still in development, consumers have to contend with conserving hard-drive space and little compatibility across devices.

(Speaking of devices, iTunes Extras aren’t available yet on Apple TV or iPad. That said, it’s only a matter of time before this new breed of extras pop up on other digital storefronts, with Sony Playstation Network a likely destination given the studio involved in this foray.)

Studios are going to do their damndest to revitalize the EST market. Besides the fact that the physical-disc market is clearly in decline, there are healthy high profit margins to be had. A 2009 study by Morgan Stanley pegged the revenue that goes back to the studio from an average online purchase of a new-release movie at $13–about six times what what they get from a rental.

Of course, consumers don’t care about any of that; they will only make those margins happen if they are given products worth spending on. Unfortunately, in recent years the studios have done less to spur EST and more to discourage rental of physical discs by blocking access to the extra content with messages encouraging consumers to buy the discs to get the full run of the DVD. That’s probably done little more than kick up complaints online, especially because the discs’ packaging don’t make clear that the extras are no longer available.

Getting digital lockers like Ultraviolet up and running is all well and good for creating the infrastructure necessary for consumers to bypass DVD. But what also needs to be addressed is incentivizing the consumer to make that bypass. Sony has taken a small step forward here, but one down a very uphill path.