Topics covered: Price Discrimination, Bundling, Product Cannibalization
Wal-Mart Stores Inc. just announced its entry to the digital download business last week. The launch of this long-awaited online movie store is bringing several impacts to the market and itself.
The biggest impact of this launch may be that it now frees studios to cut deals with other online services. Most studios have resisted signing deals with iTunes in part because of Apple's desire to sell movies at one price. Studios prefer variable pricing such as Wal-Mart is offering, and therefore practice price discrimination in the digital market.
Wal-Mart also said it will bundle some titles, allowing consumers to buy the "Superman Returns" DVD and the digital download for a "small additional price." This bundling act increases Wal-Mart’s market power in both the traditional and digital video businesses. It smoothes the entry to the digital download market and will help extract more consumer surplus.
However, has Wal-Mart considered carefully before this launch? Will this new digital store cannibalize its retail DVD business? "Customers have a growing interest in downloading video content, but complementary and supplemental to buying content on DVD," Kevin Swint, Wal-Mart's divisional manager for digital media, claimed. Wal-Mart reportedly objected when iTunes began selling movie downloads. It was worried that iTunes cut into its DVD business, and now it’s launching its own movie download store? The new online store will sell older titles starting at $7.50, compared with the $9.99 charged by iTunes. Will the cheaper pricing strategy save Wal-Mart from the product cannibalization besides undercutting iTunes’ market share?
"With the health of the DVD business and coming high-definition formats, retail DVD business will remain strong for quite a long time," industry expert predicted. The business of delivering popular video content on-demand over the internet is small and growing, but becoming increasingly competitive and complicated. Whether Wal-Mart can translate its success on the ground to the digital domain remains to be seen.
Source: The Washington Post