Vudu Convinces Walmart to Pay Up: Why an Also-Ran Web Movie Service Sold for More Than $100 Million

As I wrote in January, Walmart is indeed interested in buying Vudu, the online movie service. I was off about one thing, though–the price.

Walmart (WMT) will be paying more than $100 million for the service, people familiar with the deal tell me. That’s much more than the $50 million I had previously heard Vudu was seeking and much more than industry observers thought it would get.

At this point I need to advise skepticism about reported sales prices, since they’re often inflated or include theoretical but seldom achieved “earnout” clauses. But my source tells me this will be a cash deal when it officially closes, which it hasn’t. No money has changed hands yet.

Vudu is an also-ran in the online movie business, which isn’t that much of a business to begin with. So why would the world’s biggest retailer pay a premium to get in?

Because Vudu’s management has convinced Walmart that its video-compression technology is something special, people familiar with the transaction tell me. Apparently, others think so, too: Vudu was able to attract multiple bidders. I’ve heard, but haven’t been able to confirm, that one of them was Cisco (CSCO).

Vudu has licensing deals with all the big movie studios as well, but that’s of secondary importance to Walmart, which has way more leverage with Hollywood than Apple, Netflix or Amazon (AMZN): The studios need Walmart’s physical reach much more than Walmart needs to get into the digital movie business.

Still, doesn’t hurt to make nice. Walmart and Vudu have been briefing the Hollywood studios today in advance of an official announcement, which could come later today.

Here’s some more background on the piece, from my January story:

After trying for two years to compete with Netflix’s DVD-by-mail business, Walmart gave up in 2005 and agreed to send its customers directly to Netflix (NFLX). In 2007, with the backing of all the big studios and tech help from Hewlett-Packard (HPQ), the retailer tried to launch a download service, a la Apple’s (AAPL) iTunes. But it abandoned that effort in less than a year.

Meanwhile, sources say Vudu has been seeking a buyer–in the form of either a big-box retailer or an electronics manufacturer–for some time without success. Internet executive Mark Jung ran the company for a year but left in November 2008; founder Alain Rossmann became interim CEO when Jung left and has kept the title since then.

Santa Clara, Calif.-based Vudu has raised at least $21 million from Benchmark Capital and Greylock Partners.

UPDATE: Walmart has officially announced the deal, noting that it is expected to close within a few weeks. No word on price except that it won’t be material.

Walmart Announces Acquisition of Digital Entertainment Provider, VUDU
Company takes next step to enhance home entertainment and information delivery options for consumers

BENTONVILLE, Ark., Feb. 22, 2010 — Walmart announced today a definitive agreement to acquire VUDU, Inc., a leading provider of digital technologies and services that enable the delivery of entertainment content directly to broadband high-definition TVs and Blu-ray players. The deal is expected to close within the next few weeks.

VUDU is a revolutionary service, built into a growing number of broadband-ready TVs and Blu-ray players, that delivers instant access to thousands of movies and TV shows directly through the television. Customers with broadband Internet access and an Internet-ready TV or Blu-ray player can rent or purchase movies, typically in high-definition, without needing a connected computer or cable/satellite service. New movies and features will be added continually, enabling customers to enjoy a product that continues to become more robust long after they have left the store.

“The real winner here is the customer,” said Eduardo Castro-Wright, vice chairman for Walmart. “Combining VUDU’s unique digital technology and service with Walmart’s retail expertise and scale will provide customers with unprecedented access to home entertainment options as they migrate to a digital environment.”

VUDU has licensing agreements with almost every major movie studio and dozens of independent and international distributors to offer approximately 16,000 movies, including the largest 1080p library of video on-demand movies available anywhere. Via their broadband Internet connection, users have the ability to rent or buy titles and begin viewing them instantly.

VUDU will continue developing entertainment and information delivery solutions such as VUDU Apps, a platform that delivers hundreds of streaming Internet applications and services to TVs and Blu-ray players with built-in Internet connectivity. VUDU has partnered with some of the leading names in Internet and media entertainment to offer applications on its platform including Facebook, Flickr, Twitter, The New York Times and The Associated Press.

“We are excited about the opportunity to take our company’s vision to the next level,” said Edward Lichty, VUDU executive vice president. “VUDU’s services and Apps platform will give Walmart a powerful new vehicle to offer customers the content they want in a way that expands the frontier of quality, value and convenience.”

VUDU, based in Santa Clara, Calif., will become a wholly-owned subsidiary of Walmart. The company is not disclosing financial terms of the agreement as the acquisition is not material to its first quarter earnings for fiscal year 2011.