A worker walks near televisions, including Vizio brand ones, displayed at a Walmart Supercenter on February 20, 2024, in Hallandale Beach, Florida.
Joe Rydell | Getty Images
Walmart He does some shopping on his own.
The retail giant announced last week that it plans to buy smart TV maker Vizio in a $2.3 billion deal. If the acquisition goes through, the discounter will own a consumer electronics business that already sells many flat-screen TVs and soundbars through Walmart's website and stores.
However, at the heart of the acquisition is the value of being in front of millions of people while streaming their favorite TV shows and movies, and being able to tie that free time back to the Walmart purchases they make later.
“It's not really about TVs,” said Corey Tarlow, a retail analyst at Jefferies. “It's about advertising.”
Here's a closer look at the main reasons Walmart might want to buy Physio.
Walmart could benefit from Vizio's reach
When shoppers think of Vizio, they likely picture store aisles filled with giant TVs. But the growing and increasingly profitable part of the company's business is a little harder to see.
In the past few years, the company, based in Irvine, California, has reinvented itself into more than just a software company. Its TVs come with the SmartCast operating system, which allows viewers to stream and watch streaming apps, like Netflix and Hulu, without a “plug-in” device like an Amazon Fire TV Stick or Apple TV. It also allows Vizio to sell advertising.
Vizio can make money from advertising in three ways using the SmartCast system, said Dan Day, an equity research analyst who covers digital advertising for B. Riley Securities. It can sell ads on the SmartCast home screen. He can sell them on WatchFree+, Vizio's free, ad-supported streaming app. It gets a small inventory of advertising that it can sell as part of agreements with outside broadcast companies.
Vizio's SmartCast system has 18 million active accounts, according to Walmart.
As Vizio's owner, Walmart could not only price Vizio TVs on its website and in stores, but also increase the number of people using SmartCast by adding it to the big retailer's own brand of TVs, Jefferies Tarlowe said. Some of Walmart's competitors, such as Amazon, Best Buy and Target, which carry Vizio TVs, could continue to sell Vizio products after the deal, but some retail analysts have raised questions about whether they might downplay their competitors' items.
Walmart's TV brand, Onn, currently has a licensing deal with a smart TV competitor Rocco. The TVs are loaded with the Roku operating system, which supports the rival company's advertising revenue.
Tarlow and other analysts are betting that once this decade is up, SmartCast will become the operating system on Walmart's TVs — putting ads in front of millions more eyeballs.
Walmart will get Vizio data
Vizio knows what customers are watching. Walmart knows what they are buying.
Through the acquisition, the two companies can combine that data to make ads more personalized and effective.
Vizio TVs include automatic content recognition technology, which allows the company to understand a customer's streaming preferences, said Kirby Grenz, founder of 43Twenty, a digital marketing firm that works with technology companies in the video space.
If Vizio knows that a viewer plays Xbox for two hours a day or streams a lot of baby shows, the company can then decide whether to run an ad for a particular snack or diaper brand.
“You'll know where to insert ads for more reach,” Grenz said.
Walmart, on the other hand, knows what shoppers are buying in-store and online — and has more granular data about customer preferences as it expands Walmart+, its subscription service and answer to Amazon's Prime.
With the Vizio deal, Walmart can use its shopping insights to provide customers with more relevant ads and will know whether they lead to a purchase, said Michael Morton, an analyst who covers Amazon and other internet companies at MoffettNathanson.
He described this as the “holy grail” for brands.
“I'm sure you've heard that joke: 50% of my ad spend is wasted,” he said. “But I don't know what 50% is.” “That's not the case for these retail media networks. Sellers can measure all of that.”
Advertisements are more profitable than milk, bread and socks
When running a store, Walmart has to keep the lights on, pay employees and stock the items to stock shelves. With her online business, she has to pick, pack and ship orders.
Advertising, on the other hand, costs much less, Morton said.
“It's incredibly profitable,” he said, especially when you compare the costs of packing and shipping an online order with the costs of placing a product placement ad on a web page.
The operating margin, which measures how much a company earns on each dollar of sales after deducting costs, is 65% or higher for advertising, according to a Jefferies-Tarlow estimate. That compares to the roughly 4% operating margin Walmart reported in its last fiscal year.
Walmart is trying to grow profits faster from sales by using automation and leaning toward higher-margin businesses. Tarlowe compared it to preparing two separate income statements — one for its legacy retail operations and a second for its newer businesses like Walmart+, third-party marketplace fulfillment services and more.
By combining the two, Walmart becomes a higher profit margin company overall.
In addition, Walmart sees how much money its competitor is making, Amazonmakes ads – and wants to run the same play.
Sales at Amazon's advertising unit grew 27% year over year to nearly $15 billion in its most recently reported fiscal quarter. It sells ads for its website, such as placing sponsored products at the top when a customer searches for items.
In January, the company began running ads on Prime Video content as well — an indication that it sees streaming as a bigger money-making opportunity.
Advertising is already one of Walmart's fast-growing businesses
With Vizio, Walmart can fuel an already fast-growing part of its business.
The retailer has offered more advertising opportunities in its larger stores. This includes third-party advertising on self-checkout lane displays, TVs in store aisles, ad spots on store radio and demo stations where brands can pay to have customers test their products.
As Walmart expands its third-party marketplace, sellers can purchase sponsored ads that place them at the top of search rankings or promote their products on other parts of the Walmart home page.
In its most recent fiscal year, Walmart's global advertising business grew nearly 28% to $3.4 billion. Last quarter, Walmart Connect, the company's U.S. advertising segment, grew 22% and its global business grew 33%.
Through ownership of Vizio, Walmart has another type of advertising it can sell: TV ads on streaming services, which it will likely combine with other types of advertising.
43Twenty's Greenes said it will also collect a “gatekeeper fee,” since many streaming services share a portion of their ad revenue with the smart TVs or smart devices you use.
Walmart leaders shared few details on the company's recent earnings call about its plans for Vizio, saying they would wait for the deal to close.
However, in an interview with CNBC, Walmart CFO John David Rennie called advertising “a very exciting part of our business” and described the acquisition as “a way for us to complement what we already do organically.”
“We think this is just an acceleration of what we're already doing,” he said.
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