HEARD ON THE STREET Updated March 18, 2012, 5:51 p.m. ET
Wal-Mart Stores Tries to Play Apple's Game
By JOHN JANNARONE
For years, the technology world's best and brightest innovators have failed to outfox Apple AAPL +2.65% . A new dark horse contender: Wal-Mart Stores WMT -0.16% .
The retail behemoth last week teamed up with five Hollywood studios in an effort to stem the continuing decline in DVD sales. The idea behind the effort is to encourage customers to own, rather than rent, movies by making them accessible on the Internet after they are purchased.
Wal-Mart, the country's largest seller of DVDs, will let customers convert physical discs into digital viewing rights in the so-called UltraViolet online library. Customers will then gain access to UltraViolet via Wal-Mart's Vudu site. One catch, customers will have to pay an extra $2 per DVD. They will also have to bring them to a Wal-Mart store. That could prove a convenience for some, or a turnoff to those seeking digital convenience.
The deal could pose a challenge to Apple and Amazon.com AMZN +0.25% on the retail front. Both want users to purchase and store video in their online ecosystems. Attracting more users to a particular video-storage platform, or digital locker, should help to keep users loyal to a particular provider.
Apple has so far declined to participate in UltraViolet, which is designed to let consumers view movies from an array of platforms in addition to Vudu. Instead, Apple has stuck to the closed-architecture model it employs with iTunes music; customers who buy movies on Apple's website need to view them with Apple's software. So far, Apple is at the head of the pack, with 66% of U.S. electronic movie sales and on-demand rentals in the first half of 2011, according to Tom Adams of IHS Screen Digest.
But that leading market share could decline if the Vudu plan works. The strategy is to hook customers on Vudu by moving their existing physical movie collections onto its platform. That would make it more logical to purchase digital copies on Vudu, adding them to existing UltraViolet libraries.And Wal-Mart has gotten into the game early given that electronic movie sales totaled just 115 million copies last year, versus 664 million physical DVD sales, according to IHS.
It is too early, though, to call a winner in what is the opening stage of the battle to determine how video will be distributed digitally, a key part of the fight to control the digital living room. Walt Disney, DIS +0.58% for instance, isn't part of the Wal-Mart effort, which could disappoint fans of that studio.
And in weighing different companies' moves, it is important to remember how Apple's business model works. The tech giant actually makes very little money from its software. Rather, its hardware is priced high enough to generate the bulk of profits. Since Vudu works on some key Apple devices like the iPad, more on-the-go movie watching may be a good thing no matter which software consumers use.
That is in contrast to Amazon, which probably loses money on sales of its Kindle tablet but depends on online purchases for profits. IHS reckons Amazon has 4% of the electronic movie market, along with 8.5% of DVD sales.
One option for Amazon would be to respond quickly to Wal-Mart when it introduces an UltraViolet-compatible platform. Amazon, which already undercuts Wal-Mart on prices for many items, could give customers free UltraViolet rights on DVDs.
But while it would be easy to check the history of discs purchased on Amazon, the company lacks the physical presence Wal-Mart can use to convert full DVD collections. And Amazon may be in a tough spot to absorb more expenses, given its operating margins have shrunk to virtually zero.Even if Wal-Mart's effort is only modestly successful, it could keep the bricks-and-mortar player in the movie game.