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Target Threatens Movie Studios Over Digital Downloads, DVDs

National retailers that control the lucrative DVD market are pressuring Hollywood studios to give them the same favorable deals being offered to Web-based download services such as Apple Computer Inc.'s (AAPL) iTunes.

The latest expression of concern from retailers was a letter sent to studios by the president of Target Corp. (TGT)

The letter warned that Target might have to reconsider the amount of shelf space allocated for movies if studios undercut the wholesale price of DVDs by giving online services a better deal on digital offerings, said a studio executive who saw the letter but asked to remain anonymous because he was not authorized to publicly discuss its contents.

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Similar concerns have been expressed by Wal-Mart Stores Inc. (WNT) and other retailers.

"Clearly there is some concern that there is some erosion by downloading," Judith McCourt, market research director at Home Media Retailing, said Monday.

Target declined to provide a copy of the letter sent last month.

In a prepared statement Monday, Target called for "equity between the alternative means of delivering movies to consumers."

"Target does not object to competition, but we do expect a level playing field upon which to compete with the online services," the company said.

At issue is the low price some studios charge for films downloaded through such fledgling services as MovieLink, CinemaNow and Amazon.com's (AMZN) recently launched Unbox video store.

Retailers have been talking to studios for a year about such concerns. The issue came to a head with the decision last month by The Walt Disney Co. (DIS) to sell digital downloads through Apple Computer Inc.'s iTunes store at a price that allows Apple to retail new releases for as low as $12.99.

The two-disc rerelease of Disney's "The Little Mermaid" now retails for $14.87 at Wal-Mart and $14.99 at Target. The movie can be bought for $12.99 on iTunes.

The iTunes version, however, does not include the special features contained on the second disc — one reason download services should be charged less for digital versions of films, studios have argued.

Disney is the only studio selling films on iTunes, and that could be the case for a while as other studios balk at Apple's inflexible pricing model and try to placate worried retailers.

The dispute comes amid strong DVD sales, most notably multi-disc packages of full TV seasons that command premium prices.

Overall DVD sales should grow in 2006, propelled by continuing demand for TV titles such as "Lost" and recent hit movies such as "X-Men: The Last Stand," according to Home Media Retailing magazine.

But sales could decline in 2007, according to industry analyst Richard Greenfield of Pali Research.

Online movie download services now account for less than 10 percent of movie sales, hardly a threat to retailers.

But retailers fear a shift in the future, when downloaded movies can be viewed on TVs as well as computer screens.

"I can see why Wal-Mart and Target are writing early on, but in terms of the immediacy of the threat, it's not there," McCourt said.