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Best Buy prepares for a shift to downloads

The retailer is aggressively positioning itself to sell Internet-connected televisions, Blu-ray disc players, computers and phones as sales of CDs and DVDs fall.

November 09, 2009|Ben Fritz and Dawn C. Chmielewski

Walking between rows of DVDs at the Best Buy store in West Hollywood, Brandy Moore admits that she doesn't always buy the shiny discs anymore since she started downloading movies and TV shows from Apple's iTunes Store. There's just one problem: She hasn't figured out how to watch them on her TV.

"I have a friend who's going to come over and set that up for me," the 34-year-old Los Feliz resident says. "I'm not a computer nerd."

Moore and legions of the technologically challenged like her represent the next frontier for Best Buy, which is not only the nation's largest electronics retail chain but also the second-biggest seller of DVDs, behind Wal-Mart. Sales of CDs and DVDs have declined precipitously this year; along with video games, they plunged 23% from a year ago at Best Buy stores in the company's most recent quarter. The retail giant is responding not by cutting back on entertainment but by aggressively positioning itself for a future when movies, music and games are watched, heard and played from bits instead of on discs.

It's an unusual approach for a company that has built its business over the last 43 years on physical products sold in brick-and-mortar stores. Historically, however, Best Buy has used CDs and DVDs, which combined with video games accounted for 17% of the company's revenue in its last fiscal year, to drive sales of far more profitable televisions, DVD players and stereos. Now it is betting that digital media will do the same for a new generation of hardware that connects directly to the Internet.

Best Buy's new chief executive, Brian Dunn, has told analysts the company's future depends on its becoming the hub of the connected home -- the one place where consumers like Moore can go to demystify the confusing pairing of Internet-delivered services with gadgets.

"Digital is developing as an important channel, and our three-point strategy is to drive adoption of Internet-connectable devices, drive connection and drive consumption using our deep consumer relationships," said Ryan Pirozzi, director of digital media for Best Buy.

The Minneapolis-based company made its first big digital move last year when it acquired online music service Napster for $121 million in a bid to compete with Apple, which revolutionized the music industry with 99-cent song downloads in 2003 and whose products Best Buy sells. Thus far the purchase has borne little fruit. ITunes continues to sell the vast majority of music online, and Napster is a distant fifth, behind Microsoft Corp.'s Zune service.

Best Buy remains undeterred, however. Last week it announced a partnership with technology services provider CinemaNow to create a new digital movie distribution service. Starting this year or in early 2010, the retailer plans to pre-load the as-yet-unnamed service on most of the Internet-connected televisions, Blu-ray disc players, computers and phones it sells from a variety of manufacturers. That will enable Best Buy to extend its reach into the home and sell entertainment directly to consumers without having to lure them into a store.

The concept sounds good in theory, but practical implementation is another matter.

"The challenge is: Why do you need to have a physical retailer in the midst of a transaction between the content owner and the ultimate consumer?" said Colin McGranahan, a research analyst with Sanford C. Bernstein & Co. "Clearly, they missed music. To their credit, they think the same thing will happen in movies, although at a slower pace. They've postulated that they're not going to make the same mistake twice."

Best Buy executives are already envisioning what their chain of stores might look like in the future. Instead of rows and rows of DVDs and CDs, the center of the store will be a "hub" that emphasizes home connectivity by bringing together Napster and the new online movie service with devices needed to watch them.

The store will probably still carry hot new releases, which drive foot traffic, and consumers are expected to still want to buy "collectible" packaged DVDs, CDs and games for some time to come. Just last week, Wal-Mart started an online price war with Target and Amazon.com, confident that the $10 price on titles such as "Star Trek" and "Harry Potter and the Half-Blood Prince" would spur consumer attention.

Nonetheless, the trend is clear: The amount of shelf space being devoted to DVDs, particularly older and less popular movies, is shrinking.

"Most sales of DVDs happen in the first 10 weeks they are on sale, so after that we'll have to decide if the best place to stock it is in the store or online," said Michael Vitelli, executive vice president of Best Buy's customer operating groups.

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