Why Didn't Netflix Think of This First?

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When you think about cutting-edge cloud-computing entertainment, there's a pretty safe bet that Wal-Mart (NYS: WMT) isn't the first name that pops up. However, it's the world's largest retailer that's introducing an intriguing "disc-to-digital" service that will allow DVD and Blu-ray owners to seamlessly access their movies on the cloud.

If this sounds a lot like the UltraViolet initiative, you're warm. The five studios playing along -- Paramount, Sony Pictures, 20th Century Fox, Universal Studios, and Warner Bros. -- are part of the UltraViolet movement where buyers of new DVDs and Blu-rays that are designated as UltraViolet-enabled can be streamed digitally through a unique proof of purchase.

Wal-Mart is raising the stakes by allowing shoppers to hit up any of its 3,500 participating stores to convert older titles from the five studios into UltraViolet.

It may seem awkward, but Wal-Mart is asking couch potatoes to lug their DVD collections to Wal-Mart. They will then activate the eligible discs to be viewed at anytime through the retailer's own digital video Vudu.com website.

Wal-Mart isn't a charity. It's charging disc owners $2 per disc to activate the digital copies. If someone with a standard DVD wants to have access to the HD Blu-ray-quality stream, it will be $5.

It's a fair price, even if all Wal-Mart is doing is simply checking off access to a particular title through Vudu.com. What it ultimately does is make film buffs lean more on Wal-Mart's fledgling video site.

That Vudu that you do
This certainly sounds like something Netflix (NAS: NFLX) should have been all over. The biggest shortcoming of its streaming service is a brutal lack of fresh movie titles. If subscribers could have their owned discs "validated," it would open up the streaming possibilities.

More importantly, it would help keep subscribers close. Who would leave Netflix if it was the top streaming service and a personal digital video locker?

Although there surely would be shortcomings:

  • Netflix doesn't have Wal-Mart's thousands of stores, and processing discs by mail for validation could prove costly in terms of postage.
  • If Netflix were to charge for the conversions, could it really strip access if the person canceled his or her Netflix subscription? At least Vudu is a free site.

Of course, there are ways around these obstacles. Netflix could remedy the first shortcoming by simply partnering with a national retailer for local validation.

As for charging one-time fees for a subscription service that could be discontinued, why does this have to be the Wal-Mart model exactly? Netflix could either not charge for the digital conversions, offer a maximum number of free conversions, or simply allow ex-subscribers to continue to access their converted movies.

That last option isn't as bad as it sounds. It would keep ex-subscribers close.

Chasing Sam Walton
Other video chains would have an easier path.

  • Coinstar (NAS: CSTR) could reconfigure its Redbox kiosks to do the validation at any of its 35,400 machines. This would dovetail perfectly with the video service it plans to launch later this year.
  • Dish Network (NAS: DISH) would love to find a new excuse to get you into a Blockbuster video store. While you're there, how would you feel about switching to a new satellite television provider?
  • Amazon.com (NAS: AMZN) would have the same roundtrip postage overhead as Netflix, but this is a company that's used to it and can find ways to offset the costs. Buy certain consumer electronics and get a certain number of free conversions. Get free UltraViolet upgrades on older discs purchased through the leading online retailer. As Netflix's closest competitor in terms of an existing digital smorgasbord, Amazon isn't afraid to take a near-term hit for a long-term customer. Why else would it be willing to sell Kindle Fire tablets at a loss?

It's easy to laugh at Wal-Mart. The company has blown it digitally a few times in the past. However, it's on to something with this. Expect others to follow.

Stream on
Motley Fool co-founder David Gardner has been a fan of Netflix as a disruptor for nearly a decade, but there's a new rule-breaking multibagger that's getting him excited these days. Learn more in a free report that you can download right now.

At the time this article was published The Motley Fool owns shares of Wal-Mart Stores and Amazon.com.Motley Fool newsletter serviceshave recommended buying shares of Amazon.com, Netflix, Wal-Mart Stores, and Coinstar.Motley Fool newsletter serviceshave recommended creating a diagonal call position in Wal-Mart Stores. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.Longtime Fool contributor Rick Munarriz has been a Netflix subscriber and shareholder since 2002. He does not own shares in any of the other stocks in this story. Rick is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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