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Digital Entertainment

Wal-Mart Picks Up Digital VUDU

Wal-Mart Stores' acquisition of the VUDU online movie service may presage more efforts by the world's largest retailer to goose sales of digital entertainment.

On Feb. 22, Wal-Mart (WMT) said it would buy VUDU, which sells and rents downloadable movies and TV shows that can be viewed on such Web-connected devices as Blu-ray disc players and some LG televisions. The deal "will provide customers with unprecedented access to home entertainment options as they migrate to a digital environment," Wal-Mart Vice-Chairman Eduardo Castro-Wright said in a statement. The companies didn't disclose acquisition terms.

Buying VUDU pushes Wal-Mart further into the online territory dominated by Apple (AAPL), (AMZN), and Netflix (NFLX), and helps the retailer compensate for weakness in demand for CDs and DVDs sold through brick-and-mortar outlets. "The one area of Wal-Mart's business that's under threat is digital," says Sucharita Mulpuru, an analyst Forrester Research (FORR). Wal-Mart said on Feb. 18 that sales at U.S. stores open for more than a year declined 1.6% in the fourth quarter, missing its own forecast. It also predicted a "challenging" first quarter in the U.S.

Next: knfb reading technology?

Already one of the largest U.S. sellers of digital music, Wal-Mart may not stop at TV and movies, analysts say. "They want to sell everything," says Ed Weller, an analyst at ThinkPanmure, which provides research and investment banking services. "They'll leave no stone unturned." Other possible products include electronic versions of books as well as Internet-based storage, analysts say.

A potential e-book partner is knfb Reading Technology, a joint venture of the National Federation for the Blind and Kurzweil Technologies, run by futurist Ray Kurzweil. Knfb provides a service that helps big retailers open e-book stores in a matter of weeks. "We have agreements with large retail chains," says Kurzweil, who declined to name any partners. A Wal-Mart representative declined to comment beyond the press release announcing the VUDU purchase.

Sales of digital entertainment can also fuel demand for the hardware needed to play music, TV, and movies. Apple, for instance, uses online distribution of music, TV, and other content to bolster sales of its iPod music players and iPhone mobile devices. The consumer electronics maker plans to sell e-books that can be downloaded to its forthcoming iPad tablet computer.

The VUDU purchase may help Wal-Mart generate sales of flat-panel TVs and Blu-ray players. VUDU expects to be built into more than 150 products this year, compared with 8 in 2009, Edward Lichty, executive vice-president at VUDU, told Bloomberg BusinessWeek in January.

another route: service providers

Wal-Mart's rivals are beefing up digital services, too. In October, Best Buy (BBY) announced plans to sell Netflix movies on two Insignia Blu-ray players. And in November, Best Buy said it will let buyers of certain consumer electronics buy or rent movies through a preloaded Sonic Solutions (SNIC) CinemaNow service. As part of the agreement, Best Buy acquired warrants that let it purchase shares of Sonic Solutions common stock.

Some retailers have opted to buy service providers to compete with established providers such as Amazon. Last year, for example, Barnes & Noble (BKS) acquired e-bookstore Fictionwise.

Wal-Mart briefly tried to sell downloadable movies. In 2007, the company paired with Hewlett-Packard (HPQ) to let customers purchase and download movies onto PCs, but dropped the service in months.

The download efforts may pan out this time around, says Mulpuru of Forrester. "Wal-Mart's got time," Mulpuru says. Many of its shoppers tend to adopt new technologies later than clients of other retailers, she says. "There's a little bit of extra runway that they have."

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