Walmart May Launch a Video Streaming Service

Netflix (NFLX 1.71%) is the 800-pound gorilla in the video streaming market. The company will spend somewhere around $13 billion on content this year. The cost of entry into this market is measured in the billions of dollars, and with Netflix burning mountains of cash each year, long-term profitability isn't a guarantee.

Now, Walmart (WMT -0.15%), a company that has mostly kept its focus on its core retail business, may be looking to jump into the streaming market. The Information [subscription required] reported on July 17 that the megaretailer was considering launching a low-cost video streaming service that would compete with market leaders like Netflix and Amazon.com's (AMZN -0.16%) Prime Video. Details were scarce, but such a move would introduce even more competition in an increasingly crowded market.

Image source: Walmart.

Walmart's plan

Walmart is aiming to offer a video streaming service priced below $8 per month, according to people familiar with the situation. That would undercut Amazon Prime Video and HBO Now, and match or beat Hulu and Netflix's basic plan. The company is also reportedly considering a free ad-supported service.

Data source: Netflix, Amazon, Hulu, HBO, and The Information.

Walmart is reportedly interested in going after customers in Middle America. One of The Information's sources said that Netflix and Amazon are seen by the company as more popular on the coasts. That might create an opening for Walmart to offer a differentiated service aimed at demographic groups underserved by existing options.

It's unclear how committed Walmart is to launching a video streaming service. One of The Information's sources said that the company may ultimately scrap the idea. This wouldn't be Walmart's first foray into video -- the company acquired video-on-demand service Vudu in 2010. But the model of selling shows and movies individually doesn't make much sense in a world full of cheap subscription services.

An expensive endeavor

If Walmart does go through with this plan, it would likely take billions of dollars of content spending annually to put out a product comparable with existing services. HBO spends somewhere around $2 billion annually on content, far less than Netflix, so Walmart certainly doesn't need to match the streaming giant dollar for dollar. But offering a full-scale streaming service won't be cheap.

Walmart would have no problem funding content spending from its cash flow. The company generated more than $18 billion in free cash flow in the latest fiscal year. After dividend payments, about $12 billion is left over.

But such a service would almost certainly knock down profits, potentially for years. The company is already sacrificing the bottom line to expand its e-commerce business, and investors may not be too keen to see another profit-sucking initiative take root.

But the cost may be worth it to open up another front in the war against Amazon. Walmart has ramped up its e-commerce efforts in the past few years, with the acquisition of Jet.com, free two-day shipping, and a free online grocery pick up service. That hasn't slowed down Amazon, but it has turbocharged Walmart's online growth. Entering the video streaming market with a cheap option could help convince those who have resisted signing up for Amazon Prime to stay the course.

At this point, Walmart's potential streaming service is just a rumor. But I wouldn't be all that surprised if the retailer decided to pull the trigger.