Wal-Mart's Latest Sale: Broadband

The retail giant's ISP turn is likely to push down prices and squeeze out competition. Will other big-box stores follow suit?

Broadband sellers, beware. A new provider is on the scene—and it's a known price cutter. Wal-Mart Stores (WMT) plans to announce Oct. 9 that it will resell high-speed Internet access from Hughes Communications (HUGH), the world's largest provider of broadband services via satellite.

Granted, the market for satellite broadband is small, given the widespread availability of digital subscriber line access from phone companies and cable modem services from cable operators. Currently, satellite service tends to be more expensive and it's available mainly in hard-to-reach rural areas. Fewer than 500,000 Americans subscribe to satellite broadband access, according to consultancy Parks Associates. "It's still mainly for people who don't have a choice," says Michael Cai, an analyst at Parks. Only about 10% of Americans have no access to DSL or cable broadband.

Emphasis on Services

But Wal-Mart, which will provide satellite broadband in 800 stores, could make the service more appealing—and give existing providers cause for concern. Whenever Wal-Mart enters a new market, it tends to push down prices and squeeze out competition. Consider what happened when Wal-Mart began offering sub-$1,000 flat-panel TVs. After trying to match these prices, rival Circuit City (CC) had to close 70 stores (BusinessWeek.com, 4/23/07) and lay off 3,400 employees earlier this year. CompUSA had to shutter more than half of its stores.

Wal-Mart could have a similar impact on sellers of broadband services, especially if the Hughes deal presages a bigger push into services related to high-speed Internet access. Retailers are stepping up their emphasis on services, partly in response to Wal-Mart's penchant for bargain-basement prices. To keep pace, Wal-Mart may need more than simply lower prices.

Extra services can also be a way to combat high return rates. During last year's holiday season, "a lot of (Wal-Mart) consumers got their high-definition TVs home and didn't know how to set them up, and there were high return rates," says Nick McCoy, senior consultant at researcher TNS Retail Forward. Not so in cases of rivals, such as Best Buy (BBY), which dispatches its Geek Squad technicians to help set up newly purchased gear. And services can drive PC sales, too. In its first fiscal quarter ended in May, Best Buy reported "a strong double-digit increase in computer-services revenue," according to the company's filings.

New Directions

Wal-Mart is believed to be testing Geek Squad-like services, offered by third parties, in several stores. And it's unveiling the broadband offering partly in response to other retailers, which have begun offering a wider variety of high-speed Internet access options, from carriers like AT&T (T), Verizon Communications (VZ), Comcast (CMCSA), and others, in the past year.

Evidence of this push came in March, when Best Buy bought Speakeasy, a provider of high-speed Web access, Web-calling services, and tech support. Now, Best Buy is rumored to be in talks to acquire Covad (DVW), a provider of Internet services to telcos like AT&T. Covad wouldn't comment on the rumors and Best Buy didn't respond to a request for comment.

Internationally, broadband access is making its way onto more retail shelves as well. In Britain, supermarkets Waitrose and Tesco (TSCO.L) resell broadband services, and Tesco is already a top 10 broadband service provider in Britain. This spring, even the British Post Office announced it will resell BT Group (BT)'s broadband to its customers. Until today, Wal-Mart.com only distributed AOL (TWX) dial-up service, offering features like extra storage.

Price Pressure

If marketed well, broadband could spur sales of hardware such as PCs, Web-enabled TVs, and gear like Skype (EBAY) Web-calling phones, which Wal-Mart began carrying earlier this year. While nearly 64% of Americans already have cable or DSL broadband access, according to consultancy ABI Research, the remainder are mostly the elderly still making their transition into the digital age. "They need a lot of hand-holding, and the retailers selling them their PCs are more likely to offer that," says Stan Schatt, an analyst with ABI.

Indeed, some who are less tech savvy may be more willing to buy a service from a retailer than a service provider. "They'd have a stronger affiliation to the retailer's brand than the technology service provider brand," says Jonathan Coham, an analyst at consultancy Ovum. "They are more inclined to go with a brand they've grown up with."

Is Wal-Mart that brand? That remains to be seen, as Wal-Mart isn't exactly known for hand-holding and great service. Yet, it may have one advantage over other service providers: lower prices. And average prices consumers pay for high-speed Internet service have gone up in recent years; cable broadband prices, for instance, rose to $44 recently from $42 two years ago, according to ABI Research.

Wal-Mart, with its dedication to lower prices, could apply pressure that reverses that trend.

Join a debate about Wal-Mart's foray into banking services

Before it's here, it's on the Bloomberg Terminal. LEARN MORE