VUDU Economics: What Walmart Sees in Its High-Tech Buy

Last Updated Nov 30, 2010 6:45 PM EST

Little could demonstrate that Walmart (WMT) is ready to take on Best Buy (BBBY) for dominance of advanced consumer technology than its decision to acquire VUDU, a company that helps to deliver entertainment content directly to high-definition televisions and Blu-ray players.

Walmart is moving closer to promoting cutting-edge technology, instead of simply offering well-established products. The acquisition is a wake-up call for the cable and telco companies, of course, but there are also ramifications for the consumer electronics industry.

Walmart already is a powerful force in making technology cheaper and more accessible. Now the retailer will apply its ability to broaden a market to at-home entertainment.

The deal to purchase VUDU will enable Walmart to deliver movies and television shows to TV. It also allows Walmart to counter Best Buy's recent partnership with Sonic Solutions(SNIC). Best Buy has begun providing entertainment content through that company's Roxio CinemaNow, which can be accessed from Bestbuy.com. Sonic Solutions also powers Blockbuster Online.

A range of broadband-ready Blu-Ray players, as well as LG and Mitsubishi televisions, are incorporating VUDU technology. (Ironically, the signal converter box that VUDU promotes on its website is featured as available for purchase at Best Buy for $149.) An Internet connection that can handle at least one MBPS is necessary to use the service.

Once hooked up, VUDU users will be able to purchase or rent movies and TV shows directly through their televisions; they will not need either cable or satellite service. They can stay home and get the entertainment they crave without braving the real world, unless they want to purchase The Real World.

"The real winner here is the customer," said Eduardo Castro-Wright, Walmart vice chairman, when he announced the deal.

VUDU will develop entertainment and information delivery solutions such as VUDU Apps, a platform that delivers streaming Internet applications and services to TVs and Blu-ray players with built-in web connectivity. Among the Internet and media entertainment partners VUDU has signed up are Facebook, Flickr, Twitter, the New York Times and the Associated Press.

Ultimately, price as well as innovation is going to enter the picture. Cost is the basis of Walmart's competitive position. It has also been a major part of its drive in electronics, an effort that includes more elaborate sections in its Project Impact stores, the deal with Apple for iPods, iPhones and the like, $78 Blu-ray players and $300 laptops.

And therein lies another irony. In a recent conference call in which he had to explain a third-quarter of declining comparable store sales, Castro-Wright complained about double-digit deflation in electronics. What he failed to note, though, was that Walmart's own aggressive discounting had contributed to that deflation.

In a sense, though, perhaps Walmart got what it wanted. Castro-Wright said in the conference call, as transcribed on Walmartstores.com:

The good news is that we did gain market share. We have expanded our high-end electronics assortment on both TVs and SLR cameras, and these technologies are now available through walmart.com. In approximately 400 stores, we have added high-end TVs and new LED technology, and this will roll out to all stores by April. On a positive note, we have already seen a slowing of deflation in all major electronics categories.
Yes, but do expect some price pressure on Internet entertainment delivery. And some other kinds of pressure too. Already reports are circulating that Walmart is removing some adult content from the VUDU service.