Wal-Mart Enters the Movie Download Wars

The retailer's strategy doesn't rely on price. Rather, it aims to offer far more films than rivalshelped by deals with big studios

When it comes to prices, it's hard to top Wal-Mart (WMT), even though low prices haven't helped the world's largest retailer conquer media sales. Apple's (AAPL) iTunes store is the leader in music downloads despite charging 11 cents more per song, and in video rentals Wal-Mart conceded defeat to Netflix (NFLX) two years ago.

But now there are signs the Arkansas retailer may have learned from its past stumbles in music and movies. Announcing its entry Feb. 6 into the nascent movie download business, Wal-Mart came out charging not only with the lowest price, but also a potent arsenal of backing from all of Hollywood's big studios. The company's beta download site has 3,000 titles, with most new releases costing between $14.88 and $19.88.

All the majors have signed on to the venture, lured by Wal-Mart's market reach and its marketing muscle. Among them: 20th Century Fox (NWS), Disney (DIS), Lions Gate (LGF), MGM (MGM), MTV Networks (VIA), Paramount Pictures, Sony Pictures Entertainment (SNE), Universal Studios Home Entertainment, and Warner Bros. (TWX), along with television networks including Comedy Central, Fox, and Nickelodeon.

Apple is backed by two studios, Disney (DIS) and Viacom's (VIA) Paramount Pictures, and will face challenges from Wal-Mart's deeper roster. Moreover, Wal-Mart—which holds a 40% share in the lucrative DVD market—has negotiating muscle with studios that hardly anyone can match. "We are starting with 3,000 titles right now and more will come on a daily and weekly basis, which is more than you can find anywhere on the Web," says Kevin Swint, divisional merchandise manager for digital media at

Unpredictable Market

Will customers bite? Tricky to say just yet. Downloading entire movies is a recent phenomenon, and represents barely 1% of the $17 billion market for DVD sales. Overall, Americans spend about $30 billion a year on home videos, including rentals and television programs. Wal-Mart's prices start at $7.50 for older movie titles, compared with $9.99 at iTunes. Most of Wal-Mart's newer films will be available for $14.88, with a few titles $5 more. TV episodes are available for $1.96, 4 cents cheaper than at iTunes. Since launching in September, iTunes has sold 1.3 million movie downloads. (Wal-Mart's new service doesn't work with Apple's Mac OS.) Apple didn't return a phone call seeking comment.

Downloads are available from the likes of Apple, MovieFlix, CinemaNow, and (AMZN). On Feb. 7, and digital video recording company TiVo (TIVO) began testing a service that poses a challenge for the retail giant. Customers of Amazon's "Unbox on TiVo" can download movies from Amazon straight to their TiVo box for viewing on a television set.

Amazon's service aims to solve one of the biggest challenges facing download services: delivering content to a home theater. Many services only get programming to the TV if the computer is connected via cable, a process that can degrade the quality of the movie and is confusing for many. New products are being released this year to help solve this problem, but it's too early to tell how well most work (see, 1/29/07, "Internet TV Is Finally A Reality Show").

The inability to easily watch downloaded movies on TV is only one of the problems holding the industry back. The other is speed. Download speed has been a critical bottleneck for many people to adopt the model, but that issue has begun to fade amid greater broadband penetration, newer PCs, and quicker download schemes.

Now the bigger obstacle is the lack of a seamless technology to transfer downloaded movies to the large, high-definition flat panel displays in many living rooms. Microsoft's (MSFT) new Vista software should allow people to wirelessly beam movies, but the software has just launched and not all TVs and PCs have the capability to do that yet.

Worry for the Rental Outfits?

Apple users have traditionally been early adopters of technology and tend to be fiercely loyal customers. However, Wal-Mart could find an edge in the movie battle, because of its wider selection. Even though Wal-Mart might find it difficult to convert its traditional customers, the appeal of movies offers the company a much broader customer base.

James L. McQuivey, vice-president of media and marketing at Forrester Research (FORR), points out that iTunes music succeeded because it was tied to the iPod's vast popularity. However, McQuivey believes users can download movies or TV shows into any PC and transfer that into cell phones or a portable DVD. "In fact, there are fewer Apple Macs around than PCs, so the barriers for Wal-Mart's downloadable shows are lower," says McQuivey.

Who else is sweating? McQuivey says DVD rental companies like Netflix and Blockbuster (BBI) should be worried. After all, his thinking goes, who wants to sit in a queue for a new release, when one could download and own the title inexpensively?

Netflix—the largest online video rental company, with 6.3 million subscribers—recently unveiled an online movie streaming service for its customers. But Netflix spokesman Steve Swasey sees Wal-Mart's download service and Netflix's business as complementary. "Wal-Mart is selling movie downloads, just like the DVDs in the store, while we are in the rental business, which is a completely different business model," Swasey says.

Even though it's too early to gauge its fortunes, Wal-Mart has a clearly defined media goal: enter the game early and don't let another player—i.e., Apple CEO Steve Jobs—shape the contours of the downloadable film industry. That could spell trouble for some of the movie dealers. As McQuivey notes: "When Wal-Mart enters any business or town, they manage to shutter a few stores and businesses—I don't believe it will be any different here."

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