Movie Download Wars: Wal Mart Grasping at Straws

By now, you must have heard of Walmart's (WMT) intention to enable movie downloads via the Internet. Needless to say, this has generated a lot of buzz and publicity for Walmart.

Without further ado, I want to make my opinions clear on this move by Walmart. Like their DVD rental service two years ago that would supposedly topple the likes of Netflix (NFLX) and Blockbuster (BBI), this is a desperate attempt by Walmart to ignite their image and stock price. In other words, it will not impact those that Walmart is targeting - namely Apple (AAPL), Netflix and Blockbuster. If anything, by doing so, Walmart might end up cannibalizing their own successful DVD sales.

Firstly, lets look at what Walmart is offering - which is a downloadable movie library of 3000 plus titles that will allow users to download new and old movies via the Internet to their computer. These movies would cost anywhere from $5.00 for old and unwanted titles to $20 for newer flicks. Let me punch some holes into this model:

• People do not like to watch movies on their computers.

• Why would you download a movie and be restricted to watching in on your PC when you can buy the physical copy in a store or online for the same price? You can then watch the movie without restriction on a PC, on a 50" plasma TV screen with surround sound or take it to a friends house for everyone at the party to watch.

• A typical movie would require 500 MB or more space on your hard drive. Downloading such large files can cause many problems to your PC - I know because I have faced these problems. Not only that, such movie downloads would take at least a couple of hours over a fast broadband connection. Modem and slower speed DSL users can forget about it.

• Consumers who do like to use the Internet as a movie download might be inclined to use cheaper services like CinemaNow or Movieflix. MovieFlix charges $7.95 per month for unlimited movies, while CinemaNow charges $1.99 for rentals, and anywhere from $10 to $20 for movie purchases. In addition to these services, these sites also offer members only downloadable content, and niche-based content like independent films.

• Companies like Apple and Microsoft (MSFT) have better models with their Apple TV and XBox 360, which can be used to download movies via their respective services (iTunes and Live). These movies can be watched on television, in hi-def and while they either have restricted viewing and/or proprietary formats, at least they can be viewed on TV sets rather than just on PC's.

As you can see, Walmart is grasping at straws as they try to create shareholder value by testing new waters. Unfortunately, they are entering an arena that is already dominated by other players. Each of these players give their users a distinct advantage that Walmart simply cannot provide:

Netflix - a library of over 70,000 titles (last I checked but it might have changed by the time I finish writing this post). Fast delivery. Great service. Unlimited downloads for a flat price.

Blockbuster - Total Access means you never have to be without a movie. No waiting for movies to arrive in the mail - simply exchange the online rentals in store for in-store rentals. In addition, get a Free Game or Movie every month.

CinemaNow/MovieLink - As outlined above, these are limited usage rental downloads but are cheap. Those who want to purchase can also do so. This purchase model is something Walmart is looking to emulate.

Apple/Microsoft - At the risk of being shunned by my readers by putting these names side-by-side, the service is similar. While we have yet to see the Apple TV, initial previews indicate a replica of iTunes for your TV. With millions of people already registered and active on iTunes, Apple has the distinct advantage of a captive audience. Microsoft however, has its own advantages - offering HD-DVD and regular DVD format downloads for XBox 360 owners. They have a captive audience too - that of their XBox Live community.

Amazon/Tivo - Almost a year after quelling the hype over their Online DVD rental service, Amazon has finally come up with a way to make their customer base and their online brand work for them. By pairing up with Tivo and offering video downloads through Tivo set top boxes, Amazon will have instant access to almost 5 million Tivo households.

There are other losers in this arena - I am not convinced the Amazon/Tivo partnership will come to fruition. CinemaNow and Movielink too, despite being around for a while, have not exactly attracted the volumes they had hoped for, and Blockbuster vs. Netflix is a battle that will rage on for quite some time.

So from a money-making perspective, readers who follow my picks know I have liked Apple and Blockbuster for some time. I believe Microsoft is another one that will do well for investors, although the company is primarily focused on business applications and is too large for me to actively invest in. One thing is for sure. Walmart will not have any impact on any of the services mentioned above and those investing in Walmart for this reason should think twice.

Part 2 of this series will discuss winners of these media wars including search engines, media conglomerates, cable operaters etc. Stay tuned ...

Full Disclosure: I own BBI and am short AMZN, but have no positions in AAPL, NFLX, TIVO, MSFT or WMT at this time. However, my positions might change anytime without notice.

Comments

[Rick Hanley:]

Rentals are more likely to be a mechanism for cannibalizing DVD sales revenue. A download for $20 is worth more that a physical DVD sale for $20. Much less overhead on the download.

When considering the whole impact of Wal-Mart, consider this: Wal-Mart also announced, but received rare coverage of, the availability of 60,000 titles for sale by mid-year. With Wal-Mart's pricing power, guess what that means to Netflix, Blockbuster, etc.

Red Herring
The Business of Technology
Wal-Mart Intros Movie Downloads
…Wal-Mart will use the foray into digital movies as a way to build a full-service online store aimed at home entertainment.

“We view this as the first step to move toward a multi-format and multi-channel strategy,” said Cameron Janes, director of digital media for Wal-Mart. “We are looking at leveraging the digital platform to support manufacturing on demand and offer a range of movie titles.” Those include independent films, foreign films, as well as hard-to-find titles.

Willem de Zoete, head of HP’s digital entertainment services business, said the company is building a business based on custom DVD distribution.

About 60,000 DVD titles will also become available through a mail-order service in which consumers have an option to go online and order the discs. The service will launch mid-year.

© 1993-2006 Red Herring, Inc. All rights reserved.
www.redherring.com/Art...;hed=Wal-Mart+Intros+M...

2007 Feb 08 10:00 AM

[Malkiel:]

How we evaluate these things may be a function of how skilful and savvy we are as computer users. In this case, Mr. Laljee's description of being required to watch the movies on his computer monitor once they are downloaded there and of how long it takes to download those file sizes are simply wrong. The movies will be mostly watched on an lcd tv hooked up to the computer drive with Windows Media Center as the enabling software. Plenty of people are doing it now, so it's not a big deal. In fact, astonishingly given all the attempts at Digital rights restrictions out there, many people are managing to record tv shows on their hard drives and play them back. and with the 120-400 GB hard drives which are becoming common on the newer pc's, keeping several movies on the main drive won't be a problem before they get moved to storage. As for download time, unless he misstated the size of the files, a 500mb file is a quick 5-minute download even on DSL. So the technical barriers discussed really aren't there.

The real technical barriers would be more like the ones a friend of mine encountered when attempting to download music from the Walmart web site for his son just yesterday: the download kept getting interrupted, the Walmart software viewed the interrupted download as complete and wouldn't let him retry; the phone operator insisted he had already downloaded it; and the file wouldn't let itself be moved to another folder once it had been loaded. If the movie users encounter this, the service is doomed.

But the thrust of his argument goes to some claims being made and believed by the talking head analysts at CNBC that somehow discs are going away in the future. Ain't happening, any more than web-based applications would do away with software or operating systems. As Steve Ballmer pointed out, software on the local machine will always be part of the loop; and in the movie and music world, hard storage copy will always be part of the loop.

2007 Feb 08 11:33 AM

[Faisal Laljee:]

Malkiel - most people, specially those who take kindly to the Walmart brand, are not as sophisticated as bloggers and people like us. They would not want to hook up their computer to their TV. To Tivo something, watch movies through their DVD player, purchase pay-per-view via cable set-top boxes is much simpler than hooking up the old laptop to the LCD.

2007 Feb 09 01:27 PM

[Rick Hanley:]

Cleared for Takeoff
Imagine in-store download and burn to DVD kiosks at Wal-Mart, Target, Best Buy, and/or Walgreens? Extremely cost effective availability of tens of thousands of titles. The content owners, retailers, and consumers all win. And the environment, too. No more online, physical DVD rental models that involve millions of physical deliveries each week.

What had been the key differentiator for Netflix, catalog films, will now be widely available to retailers. Clearly, we all want to see the day when in-home download is as easy as using the TV is today. That will come.




Video Business Online
DOWNLOAD-AND-BURN CLEARED FOR TAKEOFF
Movielink plans summer test with new CSS-enabled discs
By Paul Sweeting -- Video Business, 2/8/2007
FEB. 8 | The DVD industry has cleared the way for retailers and consumers to burn movie downloads to DVD for set-top playback.
The steering committee of the DVD Forum on Jan. 31 formally approved technical specifications for a new type of recordable disc for use with in-home and in-store burning of CSS-protected movies, removing the last remaining administrative hurdle to commercial deployment of download-and-burn services…

Online download services have been waiting for the approval to give consumers the option of burning movies they can now only play on their PC or portable device.
Studio-owned download service Movielink plans to begin testing burn-to-DVD downloads this summer and offer it to all consumers by the fall, chief marketing officer Mary Coller Albert said…

Wal-Mart also is said to be considering adding download-to-burn for its just-launched service.
“We expect that to improve over the course of the year, and we’ll continue to aggressively explore/evaluate opportunities and models for this option over the next year,” Wal-Mart said in an e-mailed statement…

With the final specs approved, disc makers can now begin manufacturing DVD Download blanks for sale to consumers and in bulk for enterprise applications such as in-store burning kiosks.
The discs are similar to standard DVD-R’s but are “pre-keyed” with CSS decryption codes so they can accept encrypted data.
The use of CSS—the same copy-protection system used on commercially pressed discs—is considered critical to ensuring that discs burned from downloaded movie files will be compatible with all set-top DVD players…

Initially, download-and-burn may be a bigger opportunity for bricks-and-mortar retailers that bring in DVD burning kiosks rather than for online download companies…

“In theory, it can be a very nice revenue generator [for retailers] without having to give up any kind of significant footprint,” Goodman said.

© 2007, Reed Business Information, a division of Reed Elsevier Inc. All Rights Reserved.
www.videobusiness.com/...

2007 Feb 08 11:16 PM

[Faisal Laljee:]

Rick - I don't deny that in an ideal world, all media would be distributed digitally. However, reality is quite different. There is plenty of potential for online downloadable content to work - and in most cases like Apple, Microsoft etc., this has worked really well. The point I tried to make in my article is that I believe Walmart will NOT succeed in winning this 3 front war against Apple's iTunes, the online DVD rental businesses of Blockbuster and Netflix, and finally the likes of Amazon/Tivo and XBox. Those before it like CinemaNow and Movielink were not successful despite having the appeal to the sophisticated online community, so naturally, Walmart, with its brand affilitation to the middle to lower income market will certainly not attract these sophisticated users.

2007 Feb 09 01:37 PM

[Linda Nelson:]

MovieLink and CinemaNow only offer studio films. The market for sophisticated independent films is huge, as evidenced by the large number of indie titles on Netflix. The best source for downloading to own or rent right now is Amazon.com's Unbox service. With one click, I can download content to my ZEN (mobile video iPod-like device, but ten times better). I can watch full length films (that download in about 40 minutes) either on the go or I can plug it into my TV and watch DVD quality on the "big screen". The ZEN acts like a DVR, but it's totally portable. Services like MovieLink only download or stream content that can be watched on a PC. Boring. HP will be supplying the infastructure and branded websites for downloading for companies like Walmart. Netflix's streaming is also not interesting, as it isn't mobile. By the way, EZTakes.com offers a download to own service that will let you burn a DVD that plays in your TV's regular DVD player. VOD is going to be huge and people will want the flixibility to watch it when and where they want. Those that get it right will do killler business. My film, Shifted, was the first indie title on Unbox. Independent filmmakers can make their title available for download on Amazon.com's service by using Customflix (www.customflix.com) Check it out. You'll my film on the ZEN and if you click on the ZEN you can see how easy it is for filmmakers to get their content up on the service. iTunes is missing the boat in this respect, as the video iPod is an inferior product and kids still like to go to the theater - it's a cheap date. Overall box office and attendance is down two years in a row and DVD sales are flat as a pancake. VOD is future, not necessarily on PC's but anywhere, anytime.

2007 Feb 28 11:32 PM