RETAIL-IATION

By TIM ARANGO

September 22, 2006 -- Worried about its massive DVD sales, retail behemoth Wal-Mart has told some of Hollywood's biggest players it will retaliate against them for selling movies on Apple's iTunes.

Last year when Disney announced it would begin offering episodes of the hit shows "Lost" and "Desperate Housewives" on Apple's iTunes, the reaction of the world's largest retailer sent shockwaves through the entertainment industry.

Wal-Mart, worried that offering the shows for viewing on iPods would cut into DVD sales at its stores, sent "cases and cases" of DVDs back to Disney, according to a source familiar with the matter.

Now, following Apple's entrance in to the business of selling full-length films for download, the battle between Hollywood and its largest client is getting uglier, as studio executives say Wal-Mart has overtly threatened to retaliate if they go into business with Apple.

So far, Apple has only inked a deal with one studio - Disney - on whose board Apple boss Steve Jobs sits. But after seeing the success Apple had in creating a legal download business for the music industry, the movie industry would like to come aboard.

"We all want to be in the Apple business," said one high-level executive at a major movie studio. But Apple's pricing - $9.99 to $14.99 - is lower than DVD prices at Wal-Mart.

The studios generally charge Wal-Mart a wholesale price of $17.95 for new DVDs, while Apple is paying Disney a wholesale price of about $14.50 per film, according to a studio source.

The last thing studios want to do before the holiday shopping season is to offend their biggest sales outlet; the studios, collectively, rely on Wal-Mart for some $5 billion of DVD sales in the fourth quarter.

But several weeks ago, in the midst of rumors that Apple was close to announcing a deal with Disney, Wal-Mart's David Porter - the executive responsible for stocking the retailer's shelves with DVDs and CDs and whose influence is so immense in Tinseltown that he's been named to Premiere magazine's annual power list - made the rounds of Hollywood studios.

His message, according to a studio exec involved in the discussions: that there would be "serious ramifications" if the studios hopped in bed with Apple.

"They threatened to hurt us in terms of buying less products," said this person.

The situation between Bentonville and Hollywood has gotten so heated and so high-level that Jobs recently phoned Wal-Mart CEO Lee Scott to ask him to moderate his stance, according to a source.

"What they probably will do is not hurt Disney on new titles, but will buy less of their library titles," said one source.

Library titles, however, are where Wal-Mart makes money from DVDs. The retailer typically slashes the price of new releases below cost, making up for it by selling other products to shoppers.

A Wal-Mart spokeswoman said, "We intend to meet our customer needs whether they choose to purchase movies online or in the store and will continue to work hard with all our partners to do that."