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Thursday, October 19, 2006

DVD Distribution - The Retailer Fights Back

Several border skirmishes are being fought over the lucrative business of movie distribution. These battles are not like the wars fought by the RIAA against consumers of free music downloads. Retailers are fighting to hold their space in the movie distribution niche.

Target Corp. 'accounts for about 15% of the big studios' DVD Sales' according to The WSJ article Target, a Big DVD Seller, Warns Studios Over Download Pricing. The article details efforts Target is making to tighten up its ship and keep its place in the hierarchy of distribution.

Target seems to fear an erosion of its consumer base to movie download sites like Movielink, Guba, CinemaNow, Amazon's Unbox and a little known upstart in the music download arena with an unlikely movie name called Apple ITunes! Target does have a few things going for it. Current market share and purchasing capability is very important and the movie industry and big studios can not ignore a customer that accounts for almost a fifth of its distribution.

Target also offers a significant amount of advertising and shelf space for these movies. Target may only account for 15% of sales, but they are putting titles in front of eyeballs in their stores. Target has to be concerned that they will tip a consumer off to a movie title. The consumer might then buy their household items, go home, and surf for a cheaper movie download online.

The keyword is 'cheaper' or maybe more precisely its all about price. Target is claiming that movie download services like Amazon, a Target partner, are getting access to cheaper prices for movies than traditional DVD distributors. Target would argue that this is an unfair competitive price advantage.

Now, the obvious rebuttal is that the movie download services can offer up a movie download cheaper as there is no cost of physical distribution, packaging, stocking, overhead for the bricks and mortar manufacturing line, distribution center, warehouse and store and a number of other items.

Target may win at the end of the day. First, they are a very large customer and the studios will have to make decisions for future business against current business (assuming Target doesn't build out its Amazon venture and offer up a download service of its own). Studios will not want to upset Target and so Target may when in the short term, which will be just fine with Target shareholders over the next 3-4 quarters, but not necessarily for the long haul.

Second, movie studios may not be able to defend its pricing scheme legally. The movie studios might find themselves walking a very narrow line of the law when it comes to offering content to two different customers for different prices. There are additional costs associated with Target's physical distribution, but Target offsets some of this with the scale of business.

Plus, the DVD distribution business has long been rumored to stuff a few costs in different segments of the distribution chain where they do not truly belong. If the higher costs can not be backed up with hard ABC facts, then the movie studios might find their pricing scheme under attack not just by big customers, but by the Justice Department.