OPINION: Disc Changer

The music retailing industry passed a major milestone last week when Apple’s iTunes Music Store surpassed Wal-Mart as the nation’s largest music seller.

According to NPD Research, Apple sold more albums in January and February than any other U.S. retailer, whether bricks-and-mortar or virtual, whether CD or download.

Although bricks-and-mortar retailers as a group still dominate music sales, and CD sales still outpace downloads, the gaps are closing, putting ever more pressure on traditional CD retailers.

“If you look at what is happening to the CD and the growth of the digital side, it's a pattern that is going to hold,” NPD analyst Russ Krupnick told the Los Angeles Times.

So far, movie downloads have not impacted bricks-and-mortar DVD retailers to the same degree iTunes has hurt record shops.

But that doesn’t mean digital technology will not bring changes to the business of DVD retailing. New distribution strategies and new modes of retailing are just now bubbling to the surface, bringing with them varying implications for traditional video retailers.

The trends to watch:

DVD/digital bundles: Fox, Warner, Sony Pictures, Universal and Lionsgate are all experimenting with bundling a pre-ripped digital copy of a movie with the DVD, for transfer to a hard drive or directly to a portable device.

While some see DVD/digital bundles as merely a stop-gap measure—a rough-and-ready way of “side-loading” content from a disc to a portable device until broadband speeds increase enough to let consumers easily download content directly—the gap may need stopping for longer than many think.

Anyway you slice it or compress it, video consumes a lot of bandwidth. And for now at least, DVDs offer distributors more bandwidth at a lower cost per megabyte than any alternative delivery platform.

That will take some time—and a significant capital investment in broadband networks—to change.

Managed copy with CSS: While the studios experiment with DVD/digital bundles, the DVD Copy Control Assn. continues to work on a protocol to allow consumers to rip their own copy of a DVD, under carefully DRM’d conditions, for streaming over a home network or transfer to a portable device.

That would eliminate the need to bundle a separate digital copy with the DVD, which might also eliminate the chance to merchandise a premium SKU. But, like bundling, it would also help forestall the shift to purely digital delivery.

While most of the technical details have been worked out, the discussions remain hung up over business issues, such as whether “managed-copy” should apply to any and all DVDs, or only those for which the studios choose (or have the rights) to enable copying.

The CSS Innovations Committee (part of DVD-CCA) will meet next week in Los Angeles to have another go at it.

Should they get it right (a long shot), it could help preserve the DVD as the primary vector for getting content onto a home network.

Filling stations: One of the most significant technology trends over the past couple years has been the plunging prices and increasing capacity of solid-state storage devices. While still more expensive to manufacture than a DVD, you can now easily fit a DVD’s worth of content onto a flash memory card and many DVDs’ worth on a 64MG flash drive.

Blockbuster said in January that it would seek to leverage that trend by testing electronic download kiosks in its stores, letting consumers download movies directly to a flash-based device.

Retailers in Europe, such as Moovyplay in France, are already testing similar systems.

The bandwidth requirements of video have delayed the transition from discs to digital delivery that is currently overtaking music retailers. Although some see the shift as inevitable for video as well, the delay has left open a window in which innovation and entrepreneurship have a chance to write a different script.

Get more of Paul Sweeting's analysis here.