When Vudu launched in 2007 the store was only available through the company's own set-top boxes (STBs). However, Screen Digest believes the installed base of these boxes is low. Consumers have proved to be unwilling to buy standalone STBs whose sole purpose is to deliver transactional video content. The cost of the hardware is also likely to have contributed to the poor uptake (a basic unit was originally $399).

In recent months Vudu has shifted focus, choosing to partner manufacturers such as Entone and LG to help its digital store reach a wider audience. While embedding the Vudu outlet onto third-party devices will increase the potential customer base this strategy is not without its problems.

Although terms of the latest deal have not been disclosed it seems unlikely that Vudu will be the sole transactional online movie store available through connected LG TVs. LG has already partnered CinemaNow to include the store on broadband-connected Blu-ray players and Netflix users can stream a selection of movies at no additional cost through LG TVs. If LG signs deals with other outlets Vudu may struggle to compete due to its lesser-known brand and, for digital retail, its high prices ($19.99 for a standard definition new release movie, $24.99 for the HD equivalent).

Even if Vudu attracts a meaningful number of customers to its store the company will suffer from the low margins associated with selling online movies. High wholesale prices (in some cases over 100 per cent of consumer price) mean that the bulk of the revenue generated by a digital store goes to the Studios. Companies such as Apple can afford to sell titles at break-even because it drives more lucrative hardware sales. Vudu's initial store-plus-hardware strategy mimicked this business model. But, by focusing on selling digital content rather than looking for ways to increase the appeal of its hardware, Vudu will struggle to generate substantial revenue for itself.