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Winners and Losers in the HMV Crisis (Analysis)

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The fall of Britain's biggest entertainment retailer will have an impact across the film and music industries and beyond.

LONDON -- Iconic British music and film retailer HMV's decision this week to apply for insolvency protection amid weak sales and financial stress is expected to have a ripple effect across the U.K. industry that could impact companies as far away as Hollywood and Silicon Valley.
             
For decades HMV has been the store window for the major studios and independents alike, driving their massive output through one of Europe’s key territories. But, like many brick-and-mortar companies worldwide, HMV has struggled to adjust to the consumer shift to the digital consumption of movies -- both legally and via piracy.
 
Hot on the heels of the HMV announcement, the U.K. arm of Blockbuster announced Wednesday that it also will be sold off or shut down after parent company Dish Network failed to find a buyer for the once-mighty, now-sickly DVD rental chain.
 
In HMV’s case, the problems of the digital shift -- consumers preferring to stream films online or order them through the mail instead of buying and renting them in shops -- was compounded by a weak British economy that dragged down DVD sales overall.
 
Most British analysts agree that store sales of CDs and DVDs are already in terminal decline here and that HMV's closure will only speed up the demise.
 
In 2002, just 6.5 percent of film and music sales were online. Last year, that figure had risen to 73.4 percent, and it's predicted to top 90 percent by 2015, according to figures from retail analyst Conlumino.
 
But while movie fans are ordering more films online, they still like to have the physical DVD to stick in their machine. According to the U.K.’s Entertainment Retailers Association, physical product still accounted for 93.9 percent of video sales in the territory last year.
 
Industry folks hope digital growth soon will stop the overall decline in U.K. home entertainment sales. Last year, a 12 percent fall in physical sales of music, TV shows, films and video games outweighed an 11.4 percent digital gain that pushed digital sales above the £1 billion ($1.6 billion) mark for the first time.
 
Lavinia Carey, director general of the British Video Association said: "HMV is the last specialist video retailer [in the U.K.], and BVA data shows that it has held its share of around 16 percent of volume sales over the last 10 years, while total market sales rose in the same period from 169 million units to 179 million units.”
                          
Meanwhile, Internet sales have gone from 8.5 percent to 30 percent of the market. And when it comes to consumer spending on DVDs, the Internet has taken a larger share. HMV accounts for 19 percent of the DVD sell-through business, with e-tailers making up 36 percent.
 
For home entertainment retailers worldwide, it’s an all-too-familiar tale.
             
In the U.S., the likes of Tower Records and Borders Group have ended up in liquidation or other forms of bankruptcy. Britain's Woolworths had to throw in the towel a few years ago.
                   
Now HMV has sought insolvency protection as administrators look for a buyer. The company, founded in 1921, has about 4,350 employees and 239 stores across the U.K. and Ireland.
             
Private-equity groups are being courted as buyers for HMV, which faces store closures in the event of a sale and a shutdown if no buyer steps up.
             
As HMV teeters on the brink, The Hollywood Reporter takes a look at the industry’s likely winners losers and those caught in between should the company fall.            
 
WINNERS
             
AMAZON
The British press has blamed e-commerce giant Amazon.com as one key driver of HMV's decline. DVD buyers who used to go to HMV could move online for their movie fix. Expect Amazon's share of the sell-through market in the U.K. to tick up as HMV winds down.
 
SAINSBURY’S, ASDA, TESCO             
Similar to Wal-Mart in the U.S., the big U.K. supermarket chains, including Tesco, Sainsbury's and Asda, use discounted DVDs and music as loss leaders to lure customers to their stores. The death of another entertainment specialty retailer can only increase that traffic.
 
LOSERS
             
INDIE DISTRIBUTORS             
HMV’s market share and its sales peaked in 2009, following the closure of Woolworths in 2008. But it has remained an important distributor of independent films and foreign-language fare that bigger retailers typically leave off their shelves. While the big studios have the muscle to push their product elsewhere, indie industry folks fear the death of a specialist retail outlet that  consistently has promoted their wares.
 
IN-BETWEENERS
 
HOLLYWOOD STUDIOS
The Hollywood majors would like to keep people in the habit of buying rather than just renting (or streaming) content. HMV’s demise could push consumers more toward the rental model. And one fewer retailer means the bigger chains have more say in what DVDs get stocked and more leverage in setting prices. Bad news for the studios.

But the big-box outlets expected to step in to fill the retail gap left by HMV heavily favor the studio’s mass-marketed tentpoles, so the majors stand to increase their already substantial share of the home entertainment pie.
 
MUSIC LABELS
Music industry folks said closures of some or all HMV stores would mean the loss of spaces often used by musicians to meet fans, sign autographs and sell more CDs. HMV stores often include specialty sections for heavy metal, dance music and jazz, including music from smaller labels. They face the risk of less exposure for their product in the case of HMV's demise. To help keep HMV alive, several labels have given the firm greater access to their back catalogs and allowed it to buy product on consignment, meaning it only has to pay when product is sold.

But much of the music industry already has made the (painful) shift to digital, and sales growth online is starting to compensate for brick-and-mortar decline. The U.K. singles market is virtually all online, but for albums, 69 percent of U.K. sales still come from physical CDs, so album sales could come under pressure if HMV goes under.

Universal Music Group could be the most exposed of the big labels. UMG holds rent guarantees for 14 U.K stores and two U.S. stores -- something Universal took over as part of its deal to acquire U.K. music label EMI. But sources say the music major, owned by French telecom and entertainment conglomerate Vivendi, already had factored the HMV risk into the purchase price when it bought part of EMI.