The Walmart-Vudu Match Up: An End-Run Around Cable

Last Updated Feb 24, 2010 8:32 AM EST

Wal-mart's entry into the video-on-demand business by acquiring Vudu takes aim at Netflix. But more notably, it's the latest corporate end- run around cable and telco providers' pricey direct-to-home stranglehold -- and it's eventually going to hurt.

Wal-mart, Netflix, Amazon and Sony lead a mushrooming list of video players forging real-time digital links to consumers on laptops, smartphones, video game consoles, e-readers and other wireless connected devices by relying on the so-called Internet bypass that sidesteps gatekeepers such as Comcast and Verizon.

For now, Vudu and other home entertainment services rely on Internet-connected televisions, which will struggle to reach 10 million by year's end, but grow to 60 percent of all high definition television by 2013, according to researcher iSuppli. Vudu recently abandoned its own set-top box hardware to have its interactive service installed into HD and Blu-ray devices where it competes with Netflix, Amazon, Microsoft, Sony, Apple, Roxio, Blockbuster and CinemaNow.

Although the Vudu deal doesn't immediately upset the in-home video landscape, it signals Wal-mart's intent to leverage its dominant branded user base in a larger bid for an interactive hot line to homes. VOD movies (which will increasingly replace fading DVD revenues) could be a popular draw in a more dynamic interactive scheme that could incorporate social media and e-commerce elements as well as the sale of e-books and other content.

Comcast, Time Warner Cable and other service providers have been loath to acknowledge growing threat of Internet-bypass services via video game consoles, IPTVs and other connected devices which Parks Associates analysts identify as a major 2010 trend.

More than 17 percent of US households use a TV-PC connection to view video, and another 13 million homes rely on Web video capacity. One quarter of Xbox users routinely watch video on their consoles weekly, and one-third at least once monthly.

Revenues generated from Internet-connected VOD will near $1 billion this year and top $3.6 billion by 2014, comprising 40 percent of all premium online video transactions projected to top $8 billion, Parks says.

The share of active online video viewers (39 percent for full-length TV programs and 30 percent for full-length movies) nearly matches the 37 percent of digital cable subscribers using premium VOD, according to a recent Park survey.

The major reason one-third of Americans are still not connected to the Internet at home is affordability, according to a new survey by the Federal Communications Commission. It's a customer relations black eye for cable and other service providers that thrift-conscious Wal-mart will likely address.

More than 55 percent of American adults maintain wireless Internet connections on their lap tops or smart mobile devices, according to Pew Research.

To the extent that consumer electronics, technology and brand marketers collectively work to provide cheaper wireless Internet-connected alternatives, cable and Telco operators will take a hit to their bottom lines.

Google says it will begin experimenting with a new generation of apps and deployment that will make Internet access faster and cheaper. Google will build and test ultra high-speed broadband networks serving up to 500,000 homes with Internet speed 100-times faster than existing cable and Telco providers, who also will have open access to the infrastructure.

Strategy Analytics recently found that half of cable subscribers it surveyed said they would switch to alternative access over a mere 10 percent price discount easily achieved by direct Internet bypass options.

Good thing, then, that cable operators are headed for a broadband-centric future sans video, according to Bernstein Research analyst Craig Moffett. Even now, high-speed data delivery has largely offset the steady loss of video subscribers and revenues. "New pathways to the home for video and other entertainment will reduce the value of cable's video distribution bottleneck," Moffett says.

Wal-mart is certain to have a hand in forcing cable and telco operators to become "byte" providers of infrastructure - not media.

  • Diane Mermigas

    Diane Mermigas has been a contributing editor and columnist at Mediapost, The Hollywood Reporter and Crain Communications as well as writing for such sites as Seeking Alpha, TrueSlant and BNET. In addition to speaking and television appearances, Diane consults with companies in digital transition, and is completing a book on the future of media.