RIP, CD: Best Buy to Cut CDs, DVDs as Google, Apple Prep for Music War

CD ya later!

Retail giant Best Buy (BBY) is set to slash the store space it allocates to compact discs and DVDs this holiday season, in a tacit acknowledgment that those products are going the way of the buggy whip. The electronics chain said it will replace the space with video games and consumer electronics like netbooks and tablet PCs.

It's the latest blow for the beleaguered compact disc, increasingly viewed as a throwback to a former era, especially as Web search giant Google (GOOG) prepares to do battle with current champion Apple (AAPL) over digital music.

The simple fact is that CD sales have been declining for years, and Best Buy is changing with the times.

Bought a CD Lately?

"Best Buy has recognized for quite awhile that CDs and DVDs are going away, and they have huge chunks of the stores devoted to them," Andy Hargreaves, who covers Best Buy for Pacific Crest Securities, told DailyFinance. "What do you do to make that space productive?"

Best Buy Chief Executive Brian Dunn announced the move during a conference call with analysts to discuss the company's most recent quarter, when it reported a 60% increase in profits. Best Buy shares jumped 6% on the results.

"We'll have another store reset before the holidays, which will include an increase in the space for higher-growth and, in the aggregate, higher-margin categories, like Best Buy Mobile, e-readers and gaming, with a heavy emphasis on new gaming platforms and pre-owned game titles," Dunn said in comments cited by Click, IBD's tech blog.

"This will be enabled by our reorganization of the DVD and CD sections," Dunn said. "The CD section in particular will shrink in space allotment." The company's business is increasingly shifting toward cell phones, electronic appliances and laptops -- as well as video games, which now rival Hollywood blockbusters in revenue for the top titles like Halo.

Video Games, 3D TVs and Tablet PCs

For Best Buy, it really is a matter of space. Traditionally, 20% of the stores have been devoted to CDs and DVDs, according to industry estimates. For some of the larger stores, that could amount to as much as 10,000 square feet -- a lot of space to fill. "They tried selling guitars in that space when Rock Band and Guitar Hero were hot," Hargreaves says.

"Best Buy can better use that space," music industry analyst Bob Lefsetz told DailyFinance. "They used to use the CDs as a loss leader, but they can't do that anymore. If you look at the music business, they killed the cassette and vinyl, and this is killing CDs, irrelevant of the demand. If they don't stock them in stores, it will kill the CD."

"The labels have kept the CD alive longer than we ever thought possible," Lefsetz says. "If you can have CDs at Whole Foods you could have CDs everywhere, in any box store."

Moving forward, the company will reorganize its stores to display motion-based gaming systems by Microsoft (MSFT) and Sony (SNE) which require space for demonstrations. The chain will also increase the space for Amazon's (AMZN) Kindle and Apple's iPad tablet.

Hargreaves describes Best Buy as the "the best house on a bad block," referring to the brutal competition in retail electronics that eviscerated Best Buy's erstwhile rival Circuit City.

"They are no doubt the best operators in the business, which is why they're the only ones left," Hargreaves says. "But retail itself is hard, and when your product prices are dropping, it's even harder. Best Buy needs a new product cycle. Maybe it's motion-based gaming, maybe it is 3D TVs or tablets, but they need a new product."

Google, Apple Prepare for Digital Music Showdown

As CD sales decline, Web giant Google is preparing to take on Apple, which has become the undisputed champ of digital music with its iTunes music store. Google is reportedly talking to the major labels about a service that would include both a download store and a subscription-style, cloud-based music locker where consumers could store their music.

Google has proposed charging users $25 per year for access to their music locker, from which they could stream music to mobile devices like smartphones and tablets, according to Billboard. Google is also pushing to allow users to listen to any song in its catalog for free once, a feature the record labels may balk at.

"The only way the recorded music industry is going to survive is through some sort of subscription model," Lefsetz says flatly. "The bottom line is the handset controlling your life, so you'll have a subscription on your handset. The apps already exist, so whoever gets there first wins."

Lefsetz says that one of these days Apple may "wake up" to the idea of a subscription service, but at any rate, the major labels aren't eager to see Steve Jobs and Co. gain more power over their industry. Lefsetz suggests that's why they might be eager to talk to Google, and use the search giant as a lever against Apple.

However the digital music wars shape up, now may be the time to stock up on CDs before they're gone from retail shelves -- although they may not have much value as rare antiques in the future. Maybe you can use them as coasters.

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