When Apple announced the launch of iTunes movie rentals and an updated AppleTV, most of the talk was about how it would compete with incumbents such as Netflix. But one company, Vudu, has more to fear than most.

It’s set-top movie box offering (see our full review) is very similar to the AppleTV/iTunes combination, minus additional features such as YouTube/Flickr integration and media extender functionality, but costs considerably more.

Until today that is.

The entry-level Vudu set-top box now retails at $295 (down from $399), with the AppleTV v2 priced from $229. Customers who purchased a Vudu box in the last 30 days , at the old price, are entitled to a $100 rebate.

But wait. Didn’t Vudu slash the price already?

Back in October we reported that Vudu had reduced the price to $250, in what turned out to be a limited time only offer. However, what we wrote then still stands:

Will the price cut give Vudu a much needed boost in the face of increasing competition? I’m not so sure. But it’s a start.

The company still faces a real challenge in persuading consumers to pony up the cash needed to buy the Vudu box in the first place, on top of renting the movies themselves. Instead, Vudu should bundle a number of rentals free with every box purchased. Or better still, turn Vudu into a subscription service similar to Netflix, with a minimum contract — say twelve months — and give the box away for free.

Any standalone set-top box designed solely to deliver paid-for content into the living room faces the same problem. It’s a big ask to have customers pay upfront for hardware, just so they can enter the store. That’s why set-top boxes that add value beyond the playback of purchased content have a much better chance of success e.g the XBox 360. It’s also the reason why Apple should open up the AppleTV to third-party web services.