Strategic design risks (1): Wal-Mart’s foolhardy reliance on “partners”

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Last February, with great fanfare Wal-Mart introduced its same-day-as-DVD video download service, as covered by the New York Times:

Wal-Mart Stores may have lost the online DVD rental battle, but it has no plans to lose the higher-stakes video downloading war.

Wal-Mart’s video download site will offer movies and television shows. The new service enters a field already crowded with competitors.

Today the company will introduce a partnership with all of the six major Hollywood studios — Walt Disney, Warner Brothers, Paramount, Sony, 20th Century Fox and Universal — to sell digital movies and television shows on its Web site (www.walmart.com/videodownloads), becoming the first traditional retailer to do so.

The move plunges Wal-Mart into competition with several established sites, like Amazon.com, CinemaNow and iTunes, and given the chain’s penchant for price cutting, could drive down the cost of a digital download.

In less than a year, on December 21, 2007 with the “Beta” tag still attached, the service was shuttered :

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Why did the nation’s biggest retailer, whose recent slogan dress-up betrays a larger ambition beyond low prices, fail so quickly and decisively?

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It never had a chance. Sure, the usual suspects — AAPL shorters and iPod/iTunes/AppleTV-killer merchants — thought this would be a “game changer” but that by now has become background noise.

There are myriad reasons why Wal-Mart has failed. The company had already closed its DVD rental site before it tried downloads. So it should have had plenty of lessons learned, especially in a fractured market with so many me-too, iTunes-killer services creating endless confusion for customers. It could also be argued that Wal-Mart just didn’t want to eat into the steady profits from its physical in-store DVD sales business.

At the end of the day, however, it comes down to one factor: Wal-Mart didn’t have competency in this business, and worse, didn’t quite figure out how to acquire it. While supply chain management and low prices are Wal-Mart’s forte, technological ingredients of digital downloads, to say nothing of the business end of branding and marketing the service, are not.

Companies that are good in one area often make the mistake of assuming that the formula that has been successful for them previously could be adapted to another market for a similar affect. Dell, for example, also fell for the very same delusion by assuming that its competencies in direct sales, supply chain management and low prices would translate into domination in digital players. Unfortunately, Dell DJ Ditty, the iPod-killer, was killed in about a year.

Wal-Mart thought that what it lacked in core competency can be outsourced. It chose HP Video Merchant Services introduced a year ago with 30 licensees:

HP Video Merchant Services provide efficient aggregation, merchandising and fulfillment of commercial video content, enabling retailers to address the growing consumer demand for greater selection of titles, improved online shopping experiences and multiple media formats…HP’s manufactured-on-demand DVD service is used to produce a DVD of any movie, TV show or other video content regardless of niche or obscurity in much smaller run quantities than would be economically viable for traditional DVD replication.

HP’s video platform prominently showcased the Wal-Mart “Success story” at its website. In an act of sheer embarrassment, the “Success story” was still available even after HP decided to shutdown the service. HP said paid video services did not perform “as expected.”

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Wal-Mart relied on HP for the download service, the six major movie studios for the content, Microsoft for the IE web browser and DRM, and hardly anyone for branding, marketing or customer service. Why the world’s largest retailer thought this was a winning formula is still a mystery, one that applies to a frightening number of companies that prove to be all too ignorant, arrogant or incompetent.

In a frenzy to catch up with Apple, the industry hasn’t learned much from the PlaysForSure debacle by watching Microsoft abandon its own DRM and introduce Zune with a new and incompatible system to compete directly against its erstwhile digital music “partners.” In another instance of mortgaging success to others’ willingness or ability to innovate, AOL recently moved its struggling video service to Amazon Unbox which in turn is based on Microsoft’s PlaysForSure.

The irony here is that Wal-Mart relied on HP that relied on Microsoft and AOL relies on Amazon that relies on Microsoft which itself no longer relies on its own PlaysForSure. When a core component of a product or service depends on the rate of innovation of another party over which you have no control or influence, it’s time to rethink strategy. It’s also time to ask yourself, twice or thrice removed from core competency, should you really be in such a business?

UPDATE: It turns out Wal-Mart actually thought about the impending implosion of their download service and fingered the culprit. From an interview last month in the New York Times, Raul Vazquez, chief executive of Wal-Mart.com:

This has been in beta. We want to understand what the customers want. And I think what we learned is that the initial experience of buying and downloading content needs to be better. We thought it was going to be easier for the customer to understand.

Yes, it’s the customer’s fault.

3 thoughts on “Strategic design risks (1): Wal-Mart’s foolhardy reliance on “partners”

  1. Excellent article. The other thing I wonder about with this endeavor is that the download movie industry business model, when successful, will be pioneered by early adopters. This has never described the average WalMart customer, who is primarily driven by value for the dollar. In fact, they are the opposite of the early adopter, who spends more money to be on the cutting edge.
    The large media providers are currently the ones stifling the advancement of the download movie business, much the way they tried to kill the VCR. Their current success in money making is a result of their failure to kill the VCR. One can only hope they’ll eventually realize that DRM is a similar failed concept, and that they will quit fighting a business model that will make them billions.

  2. Does anyone think that if the WalMart video store was pulling in cash hand over hand that HP would have “shutdown” the technology? If WalMart had been able to reach customers, the service would have “performed as expected”, HP would have kept providing it, and there’d be no story.

    Seems silly for WalMart to point in so many different directions whether than just say “We failed to achieve the mass we anticipated and are therefore moving on”.

    reinharden

  3. quote:
    “When a core component of a product or service depends on the rate of innovation of another party over which you have no control or influence, it’s time to rethink strategy.”

    This reminds me of all the times news called Steve Jobs “a control freak”!
    Maybe this is [one of] the reasons why Apple grows.

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