Wal-Mart plays a key role in digital drama

As Hollywood film studios plot their digital future, it appears that all roads lead through Bentonville, Arkansas.

Bentonville is the home of Wal-Mart, the retailer that is the largest seller of DVDs, which – in turn – are the studios’ biggest source of revenue.

As a result, any move that the studios make to sell films online must be weighed against the damage that it could do to their most important business relationship.

“There’s been a lot of indigestion because of Wal-Mart,” one studio executive says. “They’re 35 to 40 per cent of our business.”

That tension came into view this week when Apple announced a new service to sell film downloads through its iTunes store. Disney’s new releases will cost $12.99 during their first week, and then $14.99 – less than a typical DVD.

While Apple courted all the studios, only Disney agreed to sign on. The others were dissuaded, at least in part, by fear of offending Wal-Mart, according to studio executives.

Earlier this year, Disney learned the consequences of crossing Wal-Mart after it began selling High School Musical, its made-for-television film, on iTunes days before copies of the DVD hit the retailer’s shelves.

Wal-Mart, which relies on DVDs to draw customers to its stores, immediately punished the company by cutting its order. The spat was only resolved after Bob Iger, the Disney chief executive, intervened.

Neither the studios nor Wal-Mart was available to comment.

Hollywood has so far taken only tentative steps into the download business through two start-up companies, CinemaNow and MovieLink.

The studios have powerful motivations to ramp up digital distribution.

For one, they want to avoid the disastrous experience of the music industry. Record companies were reluctant to go digital and subsequently saw five years of sales growth wiped out by illegal file-sharing.

They are also looking for a new source of revenue to replace the slowdown in the $24bn DVD market. After years of double-digit growth, it is expected to expand by just 5 per cent this year, according to Adams Media Research.

“We’re running out of steam in the DVD business, and there is no other growth story in Hollywood right now,” says one executive.

Some studios have sought to persuade Wal-Mart that download customers are a unique audience, and therefore will not cannibalise their DVD sales.

Warner Brothers and Universal, two of the largest studios, have talked in the past about making Wal-Mart and other retailers their partners as they move into digital distribution.

While neither studio has spelled out what that would mean, it could involve helping the company develop its own online film business, or offering it preferential pricing.

Yet some in Hollywood have expressed frustration at Wal-Mart’s sluggish progress. The retailer has experimented over the years with electronic kiosks that would allow consumers to download films to DVDs and other ideas without settling on a plan.

This week, Wal-Mart posted a job advertisement for a business manager to oversee a new digital video category at Walmart.com.

As Wal-Mart tries to recreate its bricks-and-mortar dominance of the DVD market online, it will face tough competition. In addition to iTunes, it will have to contend with Amazon.com, which has greater experience at selling content to consumers online.

A host of other players are also pushing into the business of transmitting video direct to the living room, including other retailers, cable operators such as Comcast, and internet portals such as Yahoo and Google.

One consideration for the studios is how quickly they believe that the digital market will take hold. Under Mr Iger, Disney appears to be bullish. Its ABC television unit was the first to strike a deal with iTunes last October.

But other studios believe that it will be years before the market takes off, and that there is little value to antagonising the folks in Bentonville in the meantime.

“We’re in a period of transition, and that transition will last three to five years,” one studio executive predicts.

In the meantime, he says, Hollywood is “setting the table” with its various business partners. “We’re trying to figure out under what terms and conditions we’ll all be able to do business together.”