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As we continue to see consumers wrestle with high inflation by looking to rationalize their spending and seek good discounts and deals on retail, the importance of subscription retail programs is probably only going to increase. Walmart’s (NYSE:WMT) new such program, Walmart+, is therefore increasingly important to the company’s long-term outlook. But its early struggles out of the gate have the company looking to flex its muscles to accelerate growth.
Walmart and Paramount Global (NASDAQ:PARA) have agreed on a deal to bundle Paramount’s mainline streaming service, Paramount+ Essentials into Walmart’s Amazon Prime (AMZN) competitor, Walmart+ – because everyone’s got to have a plus service these days, streaming or otherwise.
While some consider streaming and subscription both to be sort of side deals for Walmart, I would argue both are assuming an increasingly important role in the company’s future. That makes this deal worthy of close analysis.
Bundling Is The New Growth Engine
Admittedly, on its own this might not seem like major news – pretty much everyone and their mother is bundling a streaming service these days, either with another streaming service or with some other product. In fact, just since Paramount and Walmart made the announcement there have been two other major bundle announcements: T-Mobile (TMUS) is making its Apple TV+ (AAPL) partnership permanent and YouTube TV is launching a Channel Store of dozens of other services.
But there are things about this announcement that make it a little different from a typical bundle announcement.
Walmart’s Streaming History
This isn’t Walmart’s first video rodeo, of course. Walmart had a streaming service of its own, at one point, and was sufficiently underwhelmed by it that in 2020, Walmart officially closed the sale of Vudu to Fandango, Comcast’s (CMCSA) digital store subsidiary.
At first, it wasn’t clear it would be reversing that decision anytime soon. Rather, Walmart’s new strategy is to partner with Trade Desk (TTD) for a dedicated DSP (Demand-Side Platform) with which to monetize its data. That data probably isn’t as impressive as Amazon’s since Walmart was late to the online party, but it is sufficiently impressive that Walmart is already at $2 billion of advertising revenue in 2021 and projecting strong growth.
Altogether, Walmart seems likely to stick to its new DSP strategy, so another crack at streaming didn’t seem to be in its future. But in fact, this new deal fits perfectly with that new strategy, and almost certainly represents a far superior approach to streaming and advertising for one of the few companies that might be able to give Amazon a real run for its money in the retail/advertising convergence.
But while the approach itself is solid, the execution currently seems to be somewhat lacking. My initial high excitement at this announcement – for both companies but especially Walmart – has cooled as more details about it came out and after its first month actually seeing it in action. Altogether, it no longer moves the needle for me – but if Walmart tries the same approach with better execution in the future, it could become very meaningful.
Walmart+ Early Results
Unlike Vudu, this new streaming venture is bound up with Walmart’s new subscription retail service. Walmart management never misses an opportunity to remind people that Walmart+ has grown every month since launch. It’s a rave hit with customers, they insist.
There are some numbers to support this. Only two weeks after launch, third-party research showed that 11% of Americans were already Walmart+ subscribers. Of this group, only 45% were subscribers to both Walmart+ and Amazon Prime.
That number needs a bit of context, however. First, Walmart+ didn’t pull a Disney+ and storm out of the gate with 10% market penetration in just a few days; that 11% had been building gradually for at least two years. Wal-Mart has been jumping fully into grocery delivery long before there was such a thing as Walmart+. Back in 2018, it launched Delivery Unlimited, which was basically Walmart+’s grocery delivery service without the other bells and whistles. And because Walmart+ is the exact same price as Delivery Unlimited, Walmart automatically converted all of its existing membership to the new program.
What’s more, while it may technically be growing every month, such growth seems slow. The same news article I linked announcing the new Paramount deal also showed Walmart+ hitting 16 million in May and not yet reaching 17 million at the time of the announcement. Assuming that the 2020 11% number was spread over 130 million American households, Walmart+ is growing its market penetration roughly 0.1% per month.
Walmart+’s Lack of Pluses
Maybe that’s not so surprising, considering the hyper competitive nature of retail these days. Compared to the flagship Amazon Prime program, Walmart+’s initial list of benefits was a little on the light side. The rumored free Express delivery slots wound up not being included after all, so it’s just the basic delivery service and a measly five-cent discount on gasoline, and that is only at Walmart and Murphy USA stores. The only other perk is Scan & Go, which I think will be a nice little bonus for shoppers… but probably not a big enough convenience to get them to fork over $100.
In fact, at the current price and benefits list, it’s hard to see Walmart+ breaking through. Instacart offers delivery from Walmart at the same in-store prices in many cities as well as from every other store in the Instacart network, and Instacart’s annual fee is precisely $1 more than Walmart+. Even if you’re unlucky enough to live in a city where Walmart isn’t partnered with Instacart, Amazon Prime charges only a few dollars per month more for music and video streaming, Prime Day access, and a host of other extra benefits.
Hence, the hunt for another value-add to supplement the service. Given the ubiquitousness of Prime Video these days, streaming video was perhaps the obvious choice.
A Non-Coastal Alliance
I am very bullish on Paramount Global and its streaming services, so I don’t object to the choice of service, at all. Paramount+ would be a good choice of partner for anyone seeking a streaming bundle, but it is particularly good for Walmart. Paramount management for some time has drawn a distinction not between comedy and drama, or family and prestige, but between what it calls “heartland” and “coastal” content. You can debate for yourself the merits and demerits of more traditional TV content from the more edgy, modern fare of Netflix (NFLX) and Hallmark, but it has always been clear which side of it Walmart wants to come down on.
And Paramount increasingly wants to come down on the same side of it. In a recent industry conference CEO Bob Bakish called his company “everyman focused.” Walmart+ GM and SVP says P+ has “broad appeal” and “like Walmart, they have something for everyone.”
Paramount+ is also suited to Walmart for another reason. While Paramount+ does have a few streaming-exclusive scripted properties, the vast majority of its content is either streaming sports or TV shows originally developed for its CBS broadcast station. In other words, as CEO Bakish routinely emphasizes, it is content which has been developed from the first to be ad-interrupted, with natural breaks in the action.
Advertising Ambition
That matters to Walmart, because advertising is its new focus. As part of the deal, Walmart will be allowed to resell some of Paramount+’s ad inventory on its Walmart Connect platform – the DSP partnership with Trade Desk – and become more of a rival to Amazon in one of its fastest growing divisions.
This last was actually the most exciting aspect of the deal for me. Walmart, like Amazon, has data on its customers actual purchase history, which makes it far more powerful in terms of advertising targeting than Paramount, whose ad targeting is basically only one step up from traditional cable TV.
I’ve explained elsewhere at length my reasons for believing that ultimately, only the most powerful data miners will be able to generate any significant profit from advertising, so I won’t repeat all those arguments here. But Walmart has a real chance of being in that crowd, unlike Paramount, so a deal whereby Paramount does the content and Walmart does the advertising seems like it would be extremely mutually beneficial.
Duplicative Deal
At first glance, then, this deal seems almost perfect, and potentially a fundamental shift in the power structure of streaming.
But there are a number of structural problems in how this partnership will work that will greatly reduce its appeal to consumers, thereby greatly reducing its usefulness to both companies.
The first is simply lack of exclusivity. Walmart isn’t the only one offering a free Paramount subscription. So is T-Mobile, which offers the exact same deal as part of its wireless plans. A second free subscription does little good – like everyone else Paramount has more or less abandoned the “cap to tap” streaming limit strategy – so roughly one-third of American households already had access to Walmart’s “exciting” new offer.
But that isn’t really the biggest problem.
Doing The Math For Consumers
From the beginning, one of the few things that did worry me about Paramount+ was that it was arguably overpriced. At the time of my last write-up, Paramount+ and Showtime were being sold in a bundle together for $19 per month, a frankly absurd price considering that Netflix at the time was selling for $13.
Since my initial bullish article, Paramount Global has taken some of the steps I indicated I wanted to see, first and foremost a repricing of its streaming subscriptions down to a more compelling level. Now, with Netflix hiking prices up to $15.50 and the ad-free Paramount/Showtime bundle price cut to $15 per month, the bundle is now priced cheaper than the leading industry competition, which frankly is where it needs to be. I like Paramount’s content, but claiming to be worth more than Netflix was always ridiculous. A slightly discounted ad-supported bundle at $12 per month is also available, with all the same content. Or Paramount+ is available without Showtime for $4.99.
These pricing changes are all excellent news for Paramount, however, they render Walmart’s new offering somewhat redundant and useless, because Walmart – or perhaps Paramount, but I think Walmart – has chosen to place a number of restrictions on the offer. While these restrictions are fairly typical for such deals, they are particularly debilitating in this case.
Downvote On Upgrades
The first and biggest restriction is upgrades, or lack thereof. Much like T-Mobile’s current offering, Walmart+ subscribers cannot upgrade their ad-supported Paramount+ subscription to ad-free – which costs $9.99 – and pay only the difference. They must use the ad-interrupted service. Again, this is fairly typical – the old Sprint/Hulu deal was the same, along with the Spotify/Hulu deal and a host of others. But it’s a highly anti-consumer provision that alienates the people you’re asking to become loyal customers. And it doesn’t have to happen: Peacock’s cable operator integration allows penalty-free upgrades, as does the Hulu offering in the Disney Bundle.
We know that a considerable minority of the viewing public is not willing to tolerate ads in their streaming. The old CBS All Access that became Paramount+ consistently reported that 1/3 of its subscribers were electing the ad-free option, which is almost identical to the ratios that Hulu has experienced. So a considerable portion of potential subscribers simply are not interested in a deal with these restrictions.
It’s (Not!) Showtime
One could almost defend that restriction, still, as being not only industry-standard but also vital to Walmart’s strategy of reaping advertising targeting benefits as well as consumer value benefits from the deal. But first of all, that’s not really correct – Paramount+’s best content is a number of highly profitable sports deals, which are shown with ads regardless of tier, so Walmart wouldn’t lose out by allowing upgrades – and secondly it doesn’t justify the next restriction: upgrades to bundle Showtime with Paramount+ are not allowed either.
We don’t need to make any calculations for Showtime as a stand-alone service, as the recent pricing changes render that option almost farcical. Showtime is as it has always been, sold separately for $11 per month. Compared to a $5/$10 offering for Paramount+ with or without ads, respectively.
More importantly, compare that to the $12 bundle Paramount now offers. While there is something to be said for a Paramount+ subscriber saving $5-$7 by dropping Showtime, almost no one who pays $11 for Showtime is going to forego access to Paramount+ for a measly $1 premium. This means that Showtime subscribers have no reason to partake of Walmart’s offer, either, since a separate Showtime subscription is a practically identical cost and offers the inconvenience of multiple apps. Paramount had already announced just last month it would be merging Showtime and Paramount+ into a single app, though they are slated then to remain separate services.
A Good Deal For Few
So, T-Mobile subscribers get no use from the offer. Ad-free viewers get nothing from the offer. And Showtime subscribers get nothing from the offer. Assuming each represents roughly 1/3 of the population with perfect non-correlation, the number of people who will actually find Walmart+’s new offer useful are : 100% x 2/3 x 2/3 x 2/3. Or less than one in three.
From this must be deducted one final group: those who simply cannot stand Paramount+’s app. It’s almost impossible to say what percentage of the population this group is, but P+ has long been knocked and deservedly so for having a singularly bad native app, not quite as bad as HBO Max, but not far off. A significant portion of Paramount+’s subscribers subscribe through Amazon Prime Channels and the Apple Channels Store just so they can use their far superior user interfaces instead. Paramount also just launched a similar integration with Roku (ROKU) over the summer.
These customers won’t be able to take advantage of the offer, either – only those who bill through the tech companies’ portals can route their Paramount+ viewing through their interfaces. Walmart’s beneficiaries are locked into Paramount’s very subpar app. Unlike the other factors we don’t know exactly what percentage this represents, but HBO Max with its horrendous UIX at one point had close to half of its DTC subscribers in Amazon’s package alone. So let’s call our less than one in three more like 20%. If Roku and Apple have penetrations anywhere near Amazon’s level it could be more like 10%.
Analysis Summary
Walmart’s deal represents the right kind of thinking, in my view, about what a retail giant brings to the streaming table and where it ought to focus its efforts. Production companies handle the content, platform providers like Walmart and Amazon handle the advertising targeting.
This is the right kind of deal, but with so many restrictions it probably isn’t going to fly very far. Somewhere between 80-90% of the population simply can’t use what Walmart is offering. Which is disappointing, because properly executed deals like this are exactly what Walmart should be doing.
Investment Summary
My investment recommendation for now is that investors hold off on letting this announcement add anything to their bullish sentiments for either company. Mind you, it’s not a bearish indicator either; for Paramount the worst that can happen is no one uses it, for Walmart the deal’s fixed costs are too small to be a significant hit to the bottom line. It’s just sort of nothing, for now.
However, investors should still look at this deal for what it offers about the ideal streaming deal. A deal like this, minus the onerous restrictions, is probably exactly where the future of streaming is heading. And Walmart could very well lead the charge – if it makes the next deal a little better for customers.
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