Hollywood studios are making a fortune selling movie DVD's, many times making more on DVD sales than on box office sales. Wal-Mart is the biggest retailer of DVD's in the world and they are not happy with Hollywood's plans to supply Apple with digital movies at a lower wholesale price.
Ahh yes, channel conflict. We have all dealt with this problem in the high tech business. We set up multiple distribution channels, partners, and international reps, and then need to manage the conflicts between them and even with our own direct sales force. Hollywood's problems are simple by comparison.
It is all about the money. Wal-Mart sells 40% of all DVDs sold, accounting for about $7B in DVD sales. That is Billion with a B. Wal-Mart wants the same wholesale price (or lower) as Apple gets for its movie download business for iPod users. According to BusinessWeek, Wal-Mart pays about $17 wholesale for new DVD releases. Apple is rumored to be paying only $14 wholesale. When you are selling hundreds of millions of units that $3.00 difference is a big deal. BTW, I find it hard to believe that Wal-Mart is paying $17 given their retail prices. Maybe it is a loss leader, or perhaps BusinessWeek is wrong.
What about the manufacturing costs? DVD's cost money to manufacture versus a no cost digital download. There is the cost of manufacturing a CD, jewel case, packaging, and shipping costs to distributors. Shouldn't Hollywood charge a lower price for a digital download?
Classic channel conflict problem. Various sales channels have different cost structures, competitive environments, and different target markets. Most high tech companies have experienced the same issues. Channel partners don't want to hear about our problems...they have their own business to run. If we don't treat them well and make it possible for them to make money...we will lose them to a competitor.
Content versus distribution. Who holds the power, the content provider (Hollywood) or the distribution channel (Wal-Mart)? Tough question. Both Hollywood and Wal-Mart have alternative choices, but they truly need each other.
Bricks and mortar versus online commerce. Wal-Mart is the king of retail distribution. Apple's iTunes, and now movies, is the hot channel for digital distribution. Wal-Mart represents 40% of the market and $7B in sales. Apple is just launching their service.
Can Hollywood satisfy both of them? There are billions of dollars at stake. Hollywood has lots of experience negotiating deals with movie stars to make movies. Sports teams negotiate with super star athletes. Technology companies negotiate with their channel partners too. When there are billions of dollars at stake there is always room enough for everyone to get a reasonable slice of the pie.