Retailers brace for upsurge in downloads

updated 9:28 a.m. ET April 9, 2007

MINNEAPOLIS - When movies shifted from videocassettes to DVD, retailers simply cleared the tapes off the shelves to make room for discs. That's not so easy now that movies appear poised to follow music onto the Internet.

The shift of music online has hurt stores such as Best Buy, Wal-Mart and Circuit City, and some retailers are looking to avoid a repeat with movies. Wal-Mart has launched its own movie download service, Best Buy is said to be in talks to start one, and Blockbuster explored buying movie download company Movielink earlier this year.

Music and DVDs are important to retailers because they've traditionally driven customers to stores. Each week's new releases give people a reason to come back. And for electronics retailers such as Best Buy and Circuit City Stores, discs are often a cheap impulse sale, unlike a pricey computer or TV.

But the decline in the number of CDs sold has accelerated every year since 2003, and dropped 11.7 percent last year, according to NPD Group. The number of DVDs sold grew 5 percent last year, but that was down from a 9 percent increase during the previous year. Selling prices for both music and movies have declined. And NPD said DVD sales would have slid faster if not for the growth of TV programs offered on DVD.

"They're seeing fairly rapid declines in their CD business. That's likely to happen in their DVD business," said Andrew Hargreaves, who covers electronics retailers for Pacific Crest Securities.

"There's less and less foot traffic coming in for CDs, and that's certainly hurt their traffic and hurt the conversion rates to other products," said Stacey Widlitz, who covers electronics retailers at Pali Capital. "You can be sure that they're exploring what their next move is going to be in the business."

If you can’t beat ’em...
Even if movie and music downloads don't drive shoppers into stores, they at least keep retailers like Best Buy in the movie and music business.

Wal-Mart is the furthest along after selling 3,000 movie downloads in its first month, February. Blockbuster spokeswoman Karen Raskopf said the movie rental chain intends to enter digital downloads by the end of this year, perhaps in partnership with another company.

"We don't see digital downloading becoming a huge business in the next year or two, but our view is we need to be in the business, and we don't want to be at a competitive disadvantage," she said.

Online movies have a long way to go before they're as easy to use as downloadable music. Even compressed movie files can be 100 times larger than an individual song, and Wal-Mart says a full-length movie may take as long as an hour and a half to download even over a high-speed connection.

Tech-savvy listeners who load thousands of songs onto portable music players may feel less of a need to download many movies, especially if they're going to be watched on a TV anyway. And Apple's simple buck-a-song pricing at its iTunes online store hasn't caught on in the movie world, where purchase prices vary widely and many movies aren't available at all. In many cases, movies bought online can't be burned to a DVD.

And it's not clear whether customers, once they've gone online to download a movie, will do it at the Web site of a bricks-and-mortar retailer.

"First of all, Wal-Mart's typical customer isn't your leading-edge technocrat that's likely to download and store a movie on his computer," Hargreaves said. "Secondly, the quality is terrible."

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