Cable operators, you have been warned.

If anything underscores the long-term threat to cable companies’ video service from the Internet, it is Wal-Mart Stores’ purchase of Vudu — a video-on-demand (VOD) Web service. Investors in Time Warner Cable and Comcast must hope they pay attention.

The danger isn’t immediate. Vudu is one of several digital services, including Apple’s iTunes and Amazon.com, which sell or rent movies via the Web. Watching programs from these services on a TV, while easier than it once was, remains fiddly. Vudu users need certain TV sets or Blu-Ray players with built-in Web access. Amazon requires compatible devices. Watching iTunes-acquired films on a TV requires an Apple TV box or an iPod connected to a TV. Last year, less than 5% of high-definition TVs sold had Web access, according to Macquarie.

In contrast, some two-thirds of homes with TVs are connected to either cable or phone company-delivered video, according to Nielsen. These offer regular TV channels as well as VOD. Operators like Comcast enhance VOD with free movies. No surprise then that cable VOD has gained more traction than Web services, despite its clunky interface.

But this isn’t likely to persist. Wal-Mart has the clout with manufacturers to extend the number of TV’s compatible with Vudu. It sold 14.6% of flat-panel TVs in the third quarter, estimates TraQline.

Moreover, some devices with built-in Vudu or Amazon access also connect to other online video, like Netflix‘s flat-fee streaming service. As more consumers buy these devices, cable operators could see an erosion in VOD purchases and possibly in subscriptions to certain movie channels.

Admittedly, Wal-Mart has failed before to establish a foothold in electronic distribution of video, abandoning a movie-download service a couple of years ago. Even so, the mass merchant has an incentive to make this work.

Cheap DVD rental services like Netflix and Coinstar‘s Redbox have helped erode sales of DVDs, which can’t have been good for Wal-Mart’s strategy of luring consumers into its stores with cheap DVDs. Electronic distribution of movies threatens to do away with physical disc sales altogether.

For Wal-Mart, then, having its own online presence ensures it retains some share of the movie market, potentially also replicating the cheap DVD strategy by driving traffic to Walmart.com. The fact that its e-commerce rival Amazon already is in the video-on-demand market likely gives it further motivation.

Cable still has time to buttress its defenses by, for instance, improving the user friendliness of its service. Or it could be more radical and concentrate on broadband, quitting the video-packaging business altogether. Just sitting and watching the online show unfold isn’t an option.

—Martin Peers

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