Media Wonk

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Apple peels studios from Wal-Mart - December 31, 2007

Jiminy, you go away for a few days and the world turns upside down. While Media Wonk was still trying to rub a holiday hangover from his eyes, the studios abandoned their download deals with Wal-Mart and leapt into the grasping arms of Steve Jobs and Apple. That, at least, is how I read Wal-Mart’s sotto voce shut down of its movie download service just before Christmas, followed shortly after by word that at least two, and perhaps as many as five, studios will be on hand at Macworld on Jan. 14 to help Apple unveil a new movie rental service for iTunes.

The two developments are almost certainly connected. There’s no way any studio would be making a deal like that with Apple without looping Wal-Mart, which still writes the biggest single check the studios get for their movies from any customer thanks to its domination of the DVD market. So Wal-Mart knew what was coming long before the rest of us did. Rather than use its clout to stop it, however, it decided to pull the plug on its own service (don’t be fooled by that bit about H-P withdrawing its technology support; Wal-Mart could have found another technology provider if it were committed to the concept). That represents a sea-change in how both the studios and Wal-Mart are approaching the business.

So, what does that sea-change tell us about what’s really going on in the marketplace?

1. Wal-Mart’s movie download service was not happening. The fact that nobody noticed for three day that it had been shut down tells you all you need to know about its popularity. The fact that the studios would be willing to write off Wal-Mart’s efforts without a peep confirms it.

2. The DVD business is seriously sucking wind. Wal-Mart had previously taken a dim view of studio efforts to promote the download business in ways that might have undercut its DVD sales. Fear of Wal-Mart kept individual studios from offering would-be download services the sort of pricing terms and release windows that could make digital delivery competitive with DVDs. It wasn’t until Wal-Mart got into the business itself, and could price-protect its DVD sales, that the studios were willing to move the window. As DVD sales soften, however, so too does Wal-Mart’s stick (so to speak). From Media Wonk’s conversations with studio executives, fourth-quarter sales trends were eye-opening, and not in a good way. Given the studios’ well-founded fears of getting in bed with Jobs, I doubt they’d be picking Apple over Wal-Mart if they were feeling more confident about the DVD business.

3. It’s very hard to build a new business that cannibalizes your existing business without cannibalizing your existing business. Even for Wal-Mart, trying to build a download business to protect your DVD business gets you neither.

4. The download business requires portability. At least for now it does, anyway, unless and until in-home burning of downloaded movies becomes popular. And portability means iPods. Reaching consumers on the iPod’s, of course, also means going through iTunes, with its proprietary DRM system, FairPlay. Wal-Mart knows there is no way on God’s green Earth that Apple will ever license it to use FairPlay, which means it is forever cut off from the iPod, unless the studios were somehow to permit downloads without DRM, which ain’t gonna to happen. Wal-Mart also no doubt understood that there is little the studios can do about that state of affairs, and that even all its DVD market share couldn’t realistically keep them out of Apple’s arms forever without a better download offering of its own to promise them. The studios clearly realize they can’t wait forever for a viable competitor to the iPod to emerge, and Wal-Mart knows it.

5. Portability means rentals. The studios have long been wary of a rental market for downloads out of fear that DRM hackers would quickly figure out how to retrieve permanent, high-quality copies for the price of a rental. They would clearly prefer to restrict rentals to streaming platforms, that don’t leave permanent copies behind, reserving downloads for electronic sell-through purposes. But streaming is a problem with portable devices because of slow, unreliable wireless networks, and the limited storage capability of most portable devices rules out e-sell-through. Presumably, the studios have extracted commitments from Apple for the vigorous policing and updating of FairPlay as the inevitable hacks occur.

6. Once again, Apple has managed to deflect attention from the Consumer Electronics Show it does not attend, to the Macworld conference it hosts a week later.

More in future posts.

Happy New Year.
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