Wal-Mart Stores, tapping into the potentially lucrative business of selling movies directly into the home via the Internet, has agreed to buy struggling digital distributor Vudu.
The move is a bet by the retail giant, the largest seller of DVDs in the country, that consumers eventually are going to rely upon online services to watch movies rather than buy them from Wal-Mart or rent from Blockbuster. DVD sales have declined in recent years, forcing retailers and studios to look at digital distribution to make up the gap.
"Combining Vudu's unique digital technology and service with Wal-Mart's retail expertise and scale will provide customers with unprecedented access to home entertainment options, as they migrate to a digital environment," Wal-Mart Vice Chairman Eduardo Castro-Wright said in a statement.
Terms were not disclosed.
The market for movie downloads and streaming has expanded considerably recently, with companies such as Netflix, Microsoft, Sony and Amazon.com all vying to become the video gateway into the home.
Wal-Mart will probably use its direct relationship with consumers to push its own offering, particularly when it sells TVs or high-definition Blu-ray players with built-in Internet connections.
"Presumably with the power Wal-Mart has, it will be able to strongly suggest to consumer electronics manufacturers that the Vudu service be embedded in the devices that it sells," said Bruce Eisen, a digital media consultant and former president of digital video store CinemaNow.
Electronics retailer Best Buy is pursuing a similar strategy via a partnership with CinemaNow.
Vudu launched with much fanfare in 2006, but like other Internet-connected set-top boxes such as the Apple TV and MovieBeam, it was unable to find many buyers willing to spend $400 on hardware before paying more to rent or buy movies via the Web.
"It's just really difficult to get consumers to add another device to their entertainment cabinet," said Christopher Collins, a retail analyst with Yankee Group.
Beginning in late 2008, Vudu shifted emphasis away from hardware and began striking deals to integrate its software into Internet-connected devices.
Around the same time, the company was running short on cash from its original investors and began shopping itself to potential buyers, said two people familiar with the situation.
Despite its business problems, Vudu was widely praised for the elegance of its user interface, which allowed consumers to easily find and select movies. That likely served as a key selling point for Wal-Mart.
The deal marks Wal-Mart's second attempt to get into the digital video business. In 2007, it partnered with Hewlett-Packard to launch a Web store that sold downloads of movies and television shows. That venture shut down after just 10 months. It was one of many unsuccessful film-download businesses to launch at the time. All were plagued by usage and pricing restrictions imposed by movie studios wary of undercutting the multibillion-dollar DVD business.