Tuesday, March 14, 2006

Wal-Mart and the Shanghai Pirates:

When executives from Warner Bros. heard Wal-Mart's DVD-to-order proposal in Bentonville, Ark., last year, one of its home entertainment executives pointed out that, with present technology, the delay for the customer might be as long as a half hour before he could pick up the DVD. "Great. Could you make it an hour?" the Wal-Mart executive shot back. From the point of view of Wal-Mart, the DVD need not make money itself, as long as it serves to draw—and keep—potential customers in its stores. The remaining issue is the amount of the licensing fee per copy that the studios will charge. The current proposal under discussion of $3 to $4 for older movies is not much below what the studios are now getting (after manufacturing costs) for the DVDs they sell to Wal-Mart. But once the studios agree to the scheme, they would be hard-pressed to resist pressure from Wal-Mart to reduce the licensing fee, since this costless stream of revenue could not be easily replaced. As one savvy Paramount executive points out, "There would be nothing to stop Wal-Mart from playing studios off against each other and drive the license fee down and down on titles until it's just pocket change." If Wal-Mart succeeds in this enterprise—and it rarely fails—it will close much of the gap with the Shanghai pirates.