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Best Buy Anticipates Death of DVDs

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New service hastens the gradual shift to digital downloads.

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Preparing itself for the moment when its DVD inventory is obsolete, Best Buy (BBY) has delved into the world of digital downloads. The retailer has teamed up with software company Sonic Solutions (SNIC) to utilize its online digital distribution service CinemaNow.

With a new focus on offering downloadable content as a means of distribution, Best Buy has joined the likes of Apple (AAPL), Amazon (AMZN), and Netflix (NFLX) and hopes to stay ahead of the digital curve.

Using the new service, customers will be able to buy or rent films and TV shows online without additional equipment or subscription fees. The system -- which has yet to be officially named -- will be implemented into Best Buy's electronics stock. Flat-screen TVs, DVD players, DVRs, computers, and mobile phones will soon be equipped with the CinemaNow offshoot.

While Best Buy's own Insignia brand of electronics is expected to be the first to be equipped, the company is in negotiations with Sony (SNE), Panasonic (PC), and others to become a part of the service.

Oddly enough, the partnership also joins Best Buy with a familiar name and a direct competitor. Not only is the technology behind CinemaNow found in TiVo (TIVO) DVR units -- which can be found in its retail locations -- but is also a part of Blockbuster's (BBI) online video store. Blockbuster has yet to release a statement on what it's like to be informally connected with a retailer that has taken business away from its rental sector.

The deal comes as a blessing for Best Buy as it sees lagging sales among DVDs and CDs -- not to mention the less-than-stellar launch of Blu-ray. After Netflix reported the growing number of users using its streaming On Demand service in last month's earnings report, it's clear that digital downloads are where the industry is headed and customers are ready for it to happen.

And hopefully for Best Buy, it will take some of the sting out of acquiring Napster for $121 million in 2008 -- seven years past its relevance.

Best Buy's director of digital media Ryan Pirozzi told the Los Angeles Times that the company is making online movie distribution simpler its top priority. Of the revenue generated by home movie viewing, Pirozzi stated, "Digital is developing as a channel and we're forecasting that by 2012 it will be a significant, double-digit percentage."

Although no official release date was given, the launch is expected to occur late this year or early 2010.

For more on the electronics retailer, see the special report below.

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