Wal-Mart Stores Inc.  (NYSE:WMT) started a digital movie download service with Hewlett-Packard Corp. (NASDAQ:HPQ) in 2007 that lasted for about a year until it was shut down because of lack of consumer interest.  Its digital music download service has languished for years.  Now, the world’s largest retailer may be headed for another digital blunder.

In February, the world’s largest retailer acquired the start-up Vudu, whose service allows users to get access to video content through a device that does not need to be hooked into a computer, for a reported $100 million.  Though for a gargantuan company such as Walmart, investors were nonetheless curious to learn about the retailer’s digital strategy.  They may now have their answer.

Eric Wold, analyst with Merriman Curhan Ford in New York,  argues that the retailer should join forces with Coinstar Inc.’s (NASDAQ:CSTR)   Redbox kiosk service, which is looking for a streaming partner.  In a note to clients, Wold argues that Vudu’s  transactional video-on-demand (VOD) service and Redbox would be compatible, according to Home Media magazine. ]

Walmart, which accounts for 20 percent of  Coinstar’s revenue, is adept at getting what it wants but so is another potential partner,  Amazon.com.  Should it go forward with a partnership with Redbox, the Bentonville, Arkansas company faces many challenges.  First,  Netflix Inc. (NASDAQ:NFLX) already has a huge head start on its competitors.  Then there’s the matter of profitability.  Rivals are cutting prices to build up a customer base.  Of course, costs will go up as well and that will pressure margins

Walmart is either going to have to rebrand itself or spend millions promoting Vudu.  Either strategy is fraught with risks including never-ending price wars.  Of course, the retailer wins these fights all the time in the bricks-and-mortar world but the digital universe is different.   Customers are more particular about their digital media than a package of tube socks.  Sloppy customer service is not tolerated and reputations can be  destroyed with alarming speed.

Acquiring Vudu was supposed to help boost Walmart’s lackluster TV sales.  Though expanding its digital footprint may help goose the retailer’s stock price, the case for expanding into streaming media is tougher to make.  For years, Walmart has touted itself as the home for low prices.   Its attempt a few years ago to attract wealthier clients was a disaster.

Whether Walmart has learned from its mistakes remains to be seen.  History, though, has a way of repeating itself.

–Jonathan Berr

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