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Wednesday, November 29, 2006

The Flaws in Wal-Mart's Digital Download Strategy

I'm a big supporter of experimentation. Even when experiments go awry, you tend to learn something. When they go well, they can reinvent your career, your business, or an entire industry.

That said, I think Wal-Mart's recently-announced digital download strategy (or at least, Phase I of their digital download strategy) is going to prove to be a bad experiment for Wal-Mart, the movie studios, and consumers. (Here's the Wall Street Journal coverage...NY Times...Variety.)

The gist of the strategy: once a consumer buys a DVD like `Superman Returns' ($14.87), she will have the option of also buying a digital copy for her portable video player (an additional $1.97), a PC ($2.97), or both devices ($3.97). Ostensibly, this seems like a win for Wal-Mart and the studios -- new products to sell the consumer generate additional revenue. Yee-ha!

But here's why this experiment won't work out:

1. Consumers don't like the idea of having to buy the same product two or three times. Today, when you purchase a DVD, you can play that in your living room, on your laptop while flying cross-country, or in your car's DVD player. I think consumers will feel like they're being nickled-and-dimed with the offer to pay $2.97 to watch the movie they already own on DVD. Why doesn't Wal-Mart also try selling me a blow-dryer, and then adding a surcharge if I want to plug it in at a hotel, or at my mother-in-law's house, or at the gym?

2. For Wal-Mart, the pricing is too low. It won't be economical for them to support all of the problems users are going to encounter trying to load a movie onto their portable video player when they've paid all of $1.97. (Not that I think they're going to have a whole lot of users to support, given problem #1.) Another issue for Wal-Mart is the simple resentment about being sold the same product twice, or three times.

3. For the studios, the $1.97, $2.97, and $3.97 price points could start to stick in consumers' minds. Once studios start to charge $9.99 or $12.99 for a digital movie (without a DVD purchase), consumers are going to wonder why those prices are so high. The Times piece hints at this problem: "Some studios feel that it would be better to provide the downloads free to DVD buyers, making them clearly a promotion, so that those prices do not become fixed in customers’ minds as the going rate for movies online." And studios will, like Wal-Mart, be a target for consumers' resentment about being sold the same product twice or thrice.

Your thoughts?

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