The decision to offer movie sales and rentals through Walmart.com comes just two weeks after Netflix raised prices for the majority of its customers. The price increase provoked howls of protest from consumers and led to disappointing subscriber growth projections in Netflix's earnings report released late Monday, causing a 5 percent drop in the company's stock Tuesday.
Wal-Mart, long the nation's leading seller of DVDs, signaled its intent to double-down on digital movie distribution in February 2010, when it spent a reported $100 million to acquire online video service Vudu, a Silicon Valley startup that was gradually being added to home entertainment devices.
Since the acquisition, Vudu has been able to leverage Wal-Mart's clout with manufacturers to incorporate its service into more than 300 consumer electronics products, including Internet-connected television sets, Blu-ray disc players and the Sony PlayStation 3 game console.
This spring, Vudu began offering movie rentals and purchases via the Web through Vudu.com, positioning the service to better compete with the likes of Amazon.com, Apple Inc.'s iTunes or Dish Network Corp.'s Blockbuster.
Offering Vudu's 20,000 movie titles for rental and purchase through Wal-Mart's website, which attracts about 40 million monthly visitors, is a further step in that direction. It better positions Wal-Mart to take on established online players, as well as traditional competitors such as Best Buy Co., which bought digital video service CinemaNow in May 2010.
Netflix also may be vulnerable as some customers threaten to downgrade or cancel their plans after the recently announced price hikes, potentially creating more demand for Wal-Mart and other online retailers. Based on a study of 500 Netflix users, research firm TDG predicted that 2 million to 2.5 million of the company's nearly 25 million users would cancel in the next six months.
On Wal-Mart's website, the movies will be available the same day that the DVDs go on sale in stores. Rental prices range from 99 cents to $5.99. Digital purchases are priced from $4.99 to $24.99.
Walmart.com general manager Steve Nave said the retailer was following its customers as they increasingly embrace digital movie rentals and purchases.
"We know customers are starting to shift their behavior, in terms of how they consume their media," Nave said. "We don't want to lose that customer as they shift to digital."
Wal-Mart has been a laggard in the digital space, significantly behind Apple's iTunes store and Microsoft Inc.'s Zune Marketplace and vying for third place with Sony's PlayStation Store and Amazon's Video on Demand. Wal-Mart's Vudu service accounts for less than 10 percent of all transactions — and even less revenue, because of its 99-cent promotions, according to researcher IHS Screen Digest.
"ITunes is the market leader in this field, accounting for approximately 65 percent of all movies and TV shows bought or rented over the Internet," said Arash Amel, IHS's digital media research director.
Amel doubts that incorporating the Vudu service on Wal-Mart's site will move the needle in terms of market share. Consumers have shown through the failures of other services that they don't want to watch movies on computers.
"The real strategic significance here," Amel said, is that this is the first step in Wal-Mart "trying to once more figure out how online video can add any meaningful value to the e-commerce components of its core business of physical goods."
(Ben Fritz of the Los Angeles Times contributed to this report.)