Wal-Mart Enters the Movie Download Wars

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The inability to easily watch downloaded movies on TV is only one of the problems holding the industry back. The other is speed. Download speed has been a critical bottleneck for many people to adopt the model, but that issue has begun to fade amid greater broadband penetration, newer PCs, and quicker download schemes.

Now the bigger obstacle is the lack of a seamless technology to transfer downloaded movies to the large, high-definition flat panel displays in many living rooms. Microsoft's (MSFT) new Vista software should allow people to wirelessly beam movies, but the software has just launched and not all TVs and PCs have the capability to do that yet.

Worry for the Rental Outfits?

Apple users have traditionally been early adopters of technology and tend to be fiercely loyal customers. However, Wal-Mart could find an edge in the movie battle, because of its wider selection. Even though Wal-Mart might find it difficult to convert its traditional customers, the appeal of movies offers the company a much broader customer base.

James L. McQuivey, vice-president of media and marketing at Forrester Research (FORR), points out that iTunes music succeeded because it was tied to the iPod's vast popularity. However, McQuivey believes users can download movies or TV shows into any PC and transfer that into cell phones or a portable DVD. "In fact, there are fewer Apple Macs around than PCs, so the barriers for Wal-Mart's downloadable shows are lower," says McQuivey.

Who else is sweating? McQuivey says DVD rental companies like Netflix and Blockbuster (BBI) should be worried. After all, his thinking goes, who wants to sit in a queue for a new release, when one could download and own the title inexpensively?

Netflix—the largest online video rental company, with 6.3 million subscribers—recently unveiled an online movie streaming service for its customers. But Netflix spokesman Steve Swasey sees Wal-Mart's download service and Netflix's business as complementary. "Wal-Mart is selling movie downloads, just like the DVDs in the store, while we are in the rental business, which is a completely different business model," Swasey says.

Even though it's too early to gauge its fortunes, Wal-Mart has a clearly defined media goal: enter the game early and don't let another player—i.e., Apple CEO Steve Jobs—shape the contours of the downloadable film industry. That could spell trouble for some of the movie dealers. As McQuivey notes: "When Wal-Mart enters any business or town, they manage to shutter a few stores and businesses—I don't believe it will be any different here."

Gogoi is a contributing writer for BusinessWeek.com.