Thursday, July 28, 2011, 9:17 AM ET|Posted by Will RichmondWal-Mart's news this week that it has more deeply integrated its movie streaming service VUDU into its web site and e-commerce operations is a good step forward in competing better with Amazon and iTunes. However, because the vast majority of users prefer all-you-can-eat subscription services, the reality is that VUDU's new visibility will likely have little impact on Netflix (except maybe for lighter users who are upset by Netflix's recent price change and aren't deterred by VUDU's per title rental model and restrictive expiration policies).
That raises the question of when might Wal-Mart really step up to the plate and expand VUDU into subscriptions, offering a true alternative to Netflix? It seems like the time may finally be right to make the move. In particular, Netflix's recent price change, separating DVD-by-mail and streaming-only services presents a golden opportunity for Wal-Mart to go on the offensive. Here's the logic:
Prior to Netflix's recent price change, the barrier to competing with Netflix in subscriptions was steep. As I've argued before, by marrying the selection of DVDs with the convenience of streaming, Netflix had a huge advantage against pure pay-per-use streaming and download services. In fact, this barrier helped created an amazingly benign competitive environment which Netflix capitalized on big-time.
But a byproduct of Netflix's decision to separate its DVD and streaming plans means all of a sudden VUDU and others can compete more effectively. Netflix's formidable next-day DVD-by-mail operation isn't a weapon in the streaming-only battle. Going forward winners in the subscription streaming battle will be determined by content selection, promotional leverage, delivery quality, device/living room integration, pricing and resources. On all of these dimension Wal-Mart stacks up well and could pose a major threat to Netflix.
On the content side, many of Netflix's streaming deals are non-exclusive. As Amazon's deals today with NBCU and last week with CBS illustrate, Hollywood is more than happy to license to all those willing to pay. Wal-Mart couldn't replicate Netflix's streaming library overnight, but it could aggregate a significant portion - Wal-Mart certainly has the financial muscle to do so. Wal-Mart's clout with Hollywood studios, as a traditional partner in home video, gives it huge additional credibility. Given the tangle of rights issues, for now there's a finite and known quantity of content available for streaming; accessing it is more a matter of financial resources and commitment than anything else.
Meanwhile, with tens of millions of monthly customer relationships, Wal-Mart's promotional ability is significant, allowing it to quickly and inexpensively add new subscribers. As it has done in e-commerce, Wal-Mart can bundle streaming with physical media as an additional promotion. Wal-Mart's massive size also gives it pricing flexibility; for example, if it chose to undercut Netflix by $2/mo, it could afford to do so. Lastly, VUDU has always excelled at high-quality video delivery and has integrated into numerous connected devices, so delivering a top-quality subscription experience seems very doable.
Skeptics will point out that Wal-Mart has tried and failed in previous attempts at video and music delivery. And of course, Netflix's singular focus and relentless execution are still strong barriers. All of these are fair points. But a big opportunity awaits Wal-Mart/VUDU in subscriptions if it decides to pull the trigger. Though Netflix is now a sizable company, in relative terms to Wal-Mart, it's a featherweight, akin to the mom-and-pop Main Street shops Wal-Mart has bulldozed into oblivion over the years. Netflix's recent price change has opened the door for Wal-Mart, Amazon, Apple and others to fully compete. Let's see if any of them decide to.