Wal-Mart flexes DVD muscle over iTunes profits

Apple and Wal-Mart are in discussions over an alliance that could allow the giant retailer to profit from iTunes video downloads, which have been a source of great tension between Hollywood and the retailer in recent months.

A deal could take the form of a digital download “coupon” that would allow consumers to buy movies, TV shows or music on iTunes with Apple paying the retail giant a percentage of the proceeds, one industry insider said.

What’s in it for Apple? Since studios (except for Disney, of course) have so far turned a cold shoulder to iTunes because of Wal-Mart’s demands, the computer giant would then gain access to titles from every major.

Wal-Mart is one of the nation’s biggest sellers of iPods.

Apple does sell gift cards through some other retailers such as Best Buy, Target and Amazon.com, but not at Wal-Mart.

Talks are in early stages and may not result in any deal.

But they do appear to mark a thawing of relations between allies Disney and Apple, which struck a download deal in August, and Wal-Mart.

The giant retailer warned Hollywood over the summer that it expects to be a major player in the evolution of the digital marketplace, and that studios mustn’t undercut the price of DVDs in its stores with product sold on iTunes.

Wal-Mart didn’t return calls and Apple declined to comment.

Disney so far is the sole studio in a deal with Apple, allowing Steve Jobs’ company to buy new movie releases for about $3 less than the wholesale price charged to Wal-Mart.

Others studios balked, fearing to alienate their biggest customer.

Subsequently, Apple CEO Steve Jobs, who is also a board member and major shareholder of Disney, is said to have personally reached out to Wal-Mart CEO H. Lee Scott, who badly wants to get into the digital film biz.

Hollywood has been closely watching Disney’s relationship with Wal-Mart in the wake of the deal. When Wal-Mart caught wind of talks between the studios and Apple, it threatened to cut its order of “High School Musical” over the summer.

Disney CEO Bob Iger did the deal with Jobs anyway, and the rest of Hollywood has been watching to see if and when the other shoe drops.

So far, to the surprise of many, it hasn’t. And studio sources say the rest of the majors are very close to joining Disney in a deal with Apple but are holding off until the end of the key fourth quarter, when half of all DVD sales occur.

Studio sources say the rest of the majors are very close to joining Disney in a deal with Apple but are holding off until the end of the key fourth quarter, when half of all DVD sales occur.

An alliance between Apple and Wal-Mart would demonstrate how all elements of the entertainment food chain are struggling to get ahead of the curve.

Studios are trying to calculate how much longer DVD sales — 40% of which go through Wal-Mart — will be a cornerstone of their business. So, too, is Wal-Mart.

The retailer is furthermore trying to figure out how to translate its enormous foot traffic into the digital biz that entertainment is becoming.

Tensions peaked over the summer as Wal-Mart movies and music veep David Porter paid a call to the studios as they talked with Apple’s iTunes.

As late as July, three other studios were planning to join Disney in inking an iTunes pact that would allow the Apple service to buy new releases for $14.50 vs. the $17 the studios typically charge Wal-Mart for a new release.

Apple has ordered 49,000 copies of Pixar’s “Cars” and it will sell “Pirates of the Caribbean: Dead Man’s Chest” for $12.99.

Jobs, who personally made the sales pitch to the studios, insisted on passing a lower price on to consumers since the cost of producing and shipping a DVD was taken out of the equation.

Wal-Mart also made it clear to the studios that if they did a deal with iTunes, it expected the same terms for its own download business, which is under development.

“Porter came in and said if you’re going to play this game, we want the same terms as iTunes,” said a source who attended one of the meetings.

Wal-Mart’s demand was enough to shatter a planned alliance among Fox, Universal and Lionsgate to join Disney in supplying films to iTunes.

Fox, which manages the DVD category for Wal-Mart, had a verbal agreement with Apple requiring that it be joined by two others.

U pulled out of the deal first, with the other non-Disney studios following suit.

Paramount balked at the idea of doing an iTunes deal early on, in large part because of DreamWorks Animation chief Jeffrey Katzenberg’s close ties to Bentonville and the brewing management chaos at Viacom.

With no back catalog and a stream of kid-oriented pictures, DreamWorks Animation is extremely reliant on Wal-Mart, which accounts for close to 50% of its DVD sales.

Unlike the recording biz, which watched its sales plummet due to downloads, the DVD business is still relatively healthy and remains a predictable source of profit for the studios.

But both the studios and retailers such as Wal-Mart are watching closely for signs of a dropoff; no one wants to be caught flat-footed.

At some point, however, studios know they will have to undergo a transition as the homevid market transforms from the production, sales and marketing of a packaged good –the DVD — into the sale of a digital product, perhaps in the form of a subscription business.

But studios don’t want to hand digital sales over to Apple in the way that the record labels did a few years ago — a move that took away much of their power to set pricing in the marketplace.

Wal-Mart, meanwhile, has some angst about a falloff in DVD sales as well. Customers who throw a disc in their shopping carts spend an average of $75 per trip to the store — far more than those who don’t pick up a DVD.

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