Wal Mart scaling back DVD displays latest blow to Blu Ray

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http://online.wsj.com/article/BT-CO-20090929-712807.html

Wal-Mart DVD Shift Is Latest Threat To Movie Studio Profits

By Nat Worden
Of DOW JONES NEWSWIRES

NEW YORK (Dow Jones)--A recent shift in merchandising strategy by the world's largest retailer spells more trouble for DVD sales and the entertainment industry that depends on them for profits.

As part of a larger effort to clean up its aisles and appeal to higher-end shoppers, Wal-Mart Stores Inc. (WMT) is doing away with display cases it has used in its stores to promote the latest hot movie titles.

The move comes as major film studios are already reeling from sharp declines in revenue from DVD sales as cash-strapped consumers turn to low-cost rental services and digital downloads for home movies. The DVD business is widely believed to be in permanent decline amid the rise of digital media, and Wal-Mart's move is seen as a tacit acknowledgement of its coming demise.

"We think the new strategy implies Wal-Mart no longer sees DVDs and Blu-ray discs as traffic drivers," J.P. Morgan analyst Imran Khan said.

Studio chiefs dispute that conclusion, noting the importance of DVDs as a sales category for Wal-Mart, but none would speak publicly for this story, likely out of concern about jeopardizing their relationships with the retailer.

Wal-Mart, which accounts for nearly a third of DVD retail sales in the U.S., didn't respond to inquiries for this story.

The change to its DVD selling strategy is part of a larger merchandising overhaul the company calls "Project Impact," in which it has been devoting more shelf space to top-selling products and cutting back on items that linger. The discount giant also is trying to spruce up its image and cut back on clutter in its aisles, like corrugated displays for DVDs, in hopes that it can attract a more upscale shopper.

As for DVDs, the Digital Entertainment Group estimates that overall U.S. retail sales fell 13.5% to $5.4 billion during the first half of 2009. At the same time, DVD rentals rose by 8.3% to $3.4 billion. Digital sales and rentals from services like Amazon.com Inc. (AMZN) and Apple Inc.'s (AAPL) iTunes rose 21% to $968 million.

Video on-demand revenue from pay-TV service providers, like Comcast Corp. (CMCSA), is also rising. Comcast spokeswoman Jennifer Khoury says the company served 368 million total views on its VOD platform in July, up 11% from last year.

At even lower margins, studios have cut deals with services like Netflix Inc. (NFLX), the mail-order DVD rental service.

Meanwhile, Wal-Mart and other major retailers, along with several fast-food chains, have been adding low-cost DVD rental kiosks near store entrances provided by Redbox Automated Retail LLC, a division of Coinstar Inc. (CSTR).

Redbox's prominent placement and its overnight rental price of $1 are viewed by film studio chiefs as a threat to sales, and three major studios - News Corp.'s (NWS NWSA) 20th Century Fox, Time Warner Inc.'s (TWX) Warner Brothers and General Electric Co.'s (GE) Universal Pictures - are locked in a legal battle with the company and refusing to make their new titles available to it until 28 days after their release. News Corp. owns Dow Jones, publisher of this newswire.

Starting with just 12 kiosks in 2004, Redbox is now expected to have 22,000 machines across the country by year-end.

UBS analyst Michael Morris estimates that profit margins on DVD retail sales for film studios have averaged 30% historically, making them far more profitable than ticket sales at theaters, usually a break-even business at best after factoring in marketing and production costs.

Now, with the retail business in decline, film studios are facing a burgeoning gap in their business model that cost cuts and newer forms of home entertainment revenue have yet to fill.

"I believe they will get there," Morris said. "The power still lies with the content owners, and I think these guys are working on models that can protect their profitability, but the next couple of years could be difficult."