Russ Pearlman's Blog

So, Walmart is back in the digital video distribution game. They recently announced that they will be purchasing Vudu, a 2nd tier video distribution service (for as much as $100M in cash). In just about every story I’ve read about this purchase, I hear people talk about the first time Walmart tried (in 2007 in collaboration with HP), and I’ve heard various reasons why the analysts think it failed. I’d like to add my own thoughts to that conversation as well as predict why I think this time around is different.

• Was it the price? Certainly – consumers have demonstrated time and time again that they do not value the price of digital content at the same level as physical content (at least for content they are used to getting physically).
• Was it the DRM? Certainly – the first time around, Windows DRM forced users to play movies on their PC / laptop or on Windows DRM compatible devices (i.e., NOT Apple). This was (and is) a small market – despite all the fanfare, how many people have their home TV hooked up to a Media PC?
• Was it the model? Certainly – consumers just don’t want to BUY large movie content and STORE it themselves. They prefer to RENT or STREAM and have it available “in the cloud”.
• Was it is Walmart’s best interest? Certainly – and I haven’t heard many people talk about the reality here. Walmart (in 2007) sold about 35% of all DVDs in the US. The 2nd best was in the single digits – Walmart was the 800 lbs gorilla, the banana, the safari, etc. Digital distribution did NOTHING to help sales in Walmart stores, it didn’t gain them additional margin or revenue and it didn’t fit with any of their key demographics. Walmart wasn’t behind digital distribution because it thought it was a good idea – it was doing it because a defensive strategy was presented to them by HP.

So, why did Walmart try video downloads back in 2007? Well, for several reasons I think:

• Apple. With iTunes and iTV heading towards digital, Walmart wanted to make sure their position of dominance was maintained. HP came along with a compelling offer – they would take care of the technology and risk, Walmart would simply drive traffic and negotiate with the studios.
• Apple. The studios were cutting deals with Apple for their services, and Walmart wanted to make sure they weren’t setting a precedence that would ultimately hurt Walmart. By having a service of their own, they could make sure that all deals the studios were making in digital were consistent with Walmart’s ultimate plans. (We all know that Walmart’s core competency is negotiation – this was another opportunity to leverage that strength.)
• Me-to. At the time, there were a number of “experiments” in video download services. Walmart had the name and an existing digital music business. It made sense for Walmart to be in the game too.

Will things be different with Vudu? Yes. Here’s why:

1. Walmart cares this time. Walmart doesn’t have a partner taking most of the risk, this time its a $100M gamble all their own.
2. This is no longer the digital DOWNLOAD service – Vudu is compatible with networked TVs that enable streaming right to the living room. That’s a much larger audience than the 2007 version.
3. Consumers have changed. The idea of digital delivery is not as foreign any more. It’s still somewhat rare – but it is no longer the 3-eyed alien that it once was.
4. The studios get it now. Digital has entered into a new phase of maturity at the content creator level – they now see digital as another distribution channel, not just a gimmick that might get them a few extra bucks.
5. TV’s get people to the Walmart store. Unlike 2007, acquiring compatible TVs is a reason to drive traffic into the stores. This is more consistent with Walmart’s corporate strategy.

I think this is huge industry news, and I think it will be a success. Walmart didn’t do it right the first time (but then again, it didn’t cost them much then either).

Recently, Capgemini commissioned a paper with In-Stat related to transformation in the digital space. This is part of our marketing around Digital Content Services (which I hope to post a link to our latest white-paper here soon). A portion of the research is pointing to a demographic area that In-Stat calls the ‘multi-taskers’: these are essentially digital natives who are so used to technology / entertainment that they normally do a number of things at once including emailing, text messaging, etc. while playing games and/or watching filmed entertainment. But, just how big are those groups?

In the range of 18-24 alone, there are 6.5 million males and 4.8 million females in the United States. Across all age ranges, there are about 38 million males and 28 million females. Wow… that’s pretty incredible.

So, what does that mean to my thinking about the iPad? Well, I still think there are some significant challenges to the iPad including a lack of camera, concerns about battery life and the ability for users to read on it for long periods of time. The fundamental problem in my mind, however, was that the iPad doesn’t really replace any existing devices nor does it fill in a gap. But, when thinking about these multitaskers, I starting thinking that perhaps the iPad is a perfect fit for this demographic. They will continue to use their HD TV for movies / television and their cell phone for texting, etc. But, they can also use the iPad simultaneously to play games, browse the web, etc. So, the iPad won’t be a primary device, but it will be a nice secondardy device for these multitaskers.

Given the demographics I’ve see for this group, I think that represents about 30 million potential buyers. If the update is about 15%, then I’d expect to see 4.5 million iPads ultimately sold. So, that’s my new predicition…