October 14, 2021

Frenemance or Beer Goggles: The Mating Dance of Walmart and Netflix

A Netflix Hub at Walmart was announced this week. The “store within a store” is nothing new in retail, and this should surprise no one. But what does the winding road to Netflix and Walmart becoming bedfellows portend for the future of entertainment?

The Covid 19 acceleration of e-commerce’s merciless march on brick and mortar is by now a familiar theme. E-commerce grew 21.9% in 2020, reaching 20.3% of total retail sales. Amazon rocketed further into the lead reaching $386B, far outpacing #2 Walmart.com at an estimated $67B in 2020.

Growth, however, was a win for Walmart, with a 76% year-over-year increase in online sales (2020 vs. 2019); Amazon grew by a somewhat less impressive 42% according to eMarketer. Even so, the large gap remains as Amazon e-commerce sales hover at six times those of Walmart.com.

The Need to Catch Up, Faster
Partnering with Netflix, Walmart seems determined to draft off of the streamer’s current zeitgeist. From Stranger Things (whose consumer products were first seen on the back wall at Target over four years ago) to present-day Squid Game, Netflix’s shows have been dominating watercooler conversations for the last few years.

Wanting to connect with customers, Walmart’s Jeff Evans remarked that “Walmart customers and Netflix superfans will find a new, exciting entertainment destination” at Walmart.com.

Further ideas include Walmart-exclusive experiences, such as fans voting for the merchandise they would most like to see from Netflix shows. Given the supply chain challenges also brought about by the pandemic, one wonders if products can be provided during the ever-shortening window of opportunity such a moment offers.

How Did We Get Here?
The final developments of the DVD standard occurred in 1995 and early 1996, with the first major releases coming in late fall of that year. By 2002, the DVD business was larger than the VHS business and stores such as Walmart, Target, Best Buy, and others were expanding their selections at a rapid rate, with DVD sales rising more than 50% YOY.

Also in 2002, Walmart Stores Inc. entered the nascent DVD-by-mail business, looking to capture as much of this growing market as possible. There were many competitors at the time, including Netflix, which had pioneered DVD by mail in 1998. In typical Walmart fashion, the company undercut Netflix on price, charging $18.86 vs. $19.95 per month for a maximum of three movies at one time (rather high given today’s all-you-can-watch prices for SVOD services).

By 2005, however, Walmart wanted out of the DVD-by-mail business to focus on its physical brick and mortar stores. In 2005, Walmart approached $5B in in-store DVD sales. At the time, Walmart merchandisers were routinely listed in the Hollywood Reporter’s “Most Powerful People in Hollywood” list.

The purchaser of Walmart’s DVD mail business? Netflix.

Mutual Admiration
At the time of the purchase, Reed Hastings commented that the deal with Walmart “would bolster both companies’ business.” Walmart was by then offering three DVDs for $12.97 per month, with Netflix at $17.99. But price was not everything. Admiration for the retailer in the early 2000s was high, as Walmart was voted America’s Most Valuable Company by its peers in both 2003 and 2004.

By 2021, it was Netflix in the top 10, reaching ninth. Fellow OTT players ranked first, second, third, fourth, and seventh (Apple, Amazon, Microsoft, Walt Disney, and Alphabet, respectively). Brick-and-mortar stalwart, Costco, rounded out the top 10. To be fair, Walmart did come in at #11, the company’s highest position since 2011.

It Is Not Easy To Turn A Ship at Sea
From 2005 to 2020, the entertainment industry went through many iterations, including the format wars between HD-DVD and Blu-Ray, an ill-fated attempt by Sony with PSP and UMD, the rise and fall of Redbox, Walmart entering the OTT business in 2010 with the purchase of Vudu, and the present state of “peak streaming.”

Walmart’s days of being the place-to-be for entertainment have long passed. Cannibalizing one business to grow another remains a dilemma with which most executives struggle. Thinking long-term and being able to convince Wall-Street to wait has been critical to both of the two top streamers, Netflix and Amazon.

What Next?
Amazon, with its ability to sell shoes on the back of Amazon Prime (and seemingly subsidize its large content spend and Star Trek dreams) is in a different game than Netflix. Disney leads in content spend at an estimated $30B vs. Netflix at $18B and Amazon at just under $10B (not including the impending purchase of MGM for $8.5B). Creating its own content, long in Walmart’s thoughts, is not likely to happen anytime soon. Thus, its priority is to bring more people to its stores and website and to increase engagement with customers.

Over the summer of 2021, Netflix made two noticeable moves. First, it stepped actively into the video game space hoping to capitalize on the franchise IP developed over the last few years. Games have long been viewed by Netflix as competition for their customers’ time and money. Second, it is making an even larger push into consumer products.

Size Matters
Netflix is poised to become a $300B company, joining entertainment heavyweight Disney in the “300 club.” Both, however, are facing a slowdown in subscription growth and will need to continue the war for eyeballs on new battlefields.

With Disney’s strong retail footprint (branded stores, plus the deal with Target), Netflix will find it more difficult to keep its domestic revenue growing. In October 2021, Walmart’s market cap approaches $400B, bigger than both Disney and Netflix, but a far cry from Amazon’s $1.6T.

Final Thoughts
As one’s cash cow nears its diffusion asymptote, companies often lean into other highly-competitive businesses to grow revenue and profits. Netflix, the pioneer of both DVD-by-mail and subscription streaming, seemingly “won” both businesses. However, the siren call for growth continues to push Netflix toward a strategy of “doing one thing well.”

Walmart, also with the need to do something different, brings the two companies back together to go after larger rivals. By attaching itself to more upmarket brands, Walmart will attempt to gain new customers and move up the wheel of retail…yet another subplot to keep an eye on as Hollywood watchers enter award season.


 
Douglas Montgomery is a 15+ year veteran of the Entertainment Business. His time with Warner Bros. was spent analyzing, and living the incredible changes from the VHS era, to DVD and finally Streaming.

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