September 3, 2008, 12:00 AM

Top 500 books, music and video retailers log higher sales in 2007

Web sales for books, music and video – the Top 500 shopping segment that began the online retailing movement in the 1990s – grew by a combined 32% to $4.14 billion in 2007. Among the growth drivers: more digital content.

Books, music and video – the shopping segment that began the online retailing movement in the 1990s – grew by a combined 32% to $4.14 billion in 2007 from $3.13 billion in 2006, according to data compiled in the current edition of the Internet Retailer Top 500 Guide.

But the real story behind the segment’s growth last year wasn’t the fact that Inc., No.38 in the Internet Retailer Top 500 Guide, and others keep on selling more hardcover books, CDs and DVDs. This segment of the Top 500 increased in sales because the two biggest players – Netflix Inc. (No. 17) and Blockbuster Inc. (No. 35) – now own more than 40% of the market. The combined sales for books/music/video retailers ranked in the Top 500 Guide also grew as more consumers switch their allegiance from conventional DVDs and CDs to digital downloads.

In 2007, Netflix, which owns about 29% of the online books/music/video retailing space as measured by the Top 500 Guide, grew web sales by 21% to $1.2 billion from $996.7 million in 2006. Today digital downloads represent only a fraction of the total revenue at Netflix. Because it’s so small, the company doesn’t break out any digitally related business statistics.

But Netflix also is making progress toward its goal of migrating away from a pure movie rental subscription business and into a digital services entertainment company. Netflix is investing heavily in digital content and in developing relationships with consumer electronics and other brand manufacturers. In mid-July Netflix teamed with Microsoft Corp. to begin offering digital movies and television shows on Microsoft’s Xbox 360 consoles. “As we expand more into streaming, we are improving our core consumer proposition of unlimited enjoyment for a low monthly fee by combining unlimited DVDs by mail with unlimited streaming,” Netflix CEO Reed Hastings told Wall Street analysts on a recent conference call.

The fact that the market leader sees a bright future in all things digital isn’t lost on Blockbuster. In 2007, Blockbuster grew its web-based revenue by 112% to $526.4 million from $248.3 million in 2006. Blockbuster, which is making its own push into digital entertainment, also accounted for 28% of the combined sales last year of Top 500 books/music/video retailers. To keep pace with Netflix, Blockbuster in June rolled out an interactive kiosk program at a select number of Blockbuster stores. Blockbuster also signed a testing agreement with NCR Corp., which develops kiosk and point-of-sale systems for the retailing industry, and is in discussions with other manufacturers of web-enabled handheld devices.

“We are actively exploring options to distribute that entertainment content to our customers via many different digital platforms that are available and emerging in the marketplace,” Blockbuster CEO Jim Keyes told analysts on the company’s first quarter earnings call. “We also are acquiring digital entertainment distribution rights that we know would be appealing to our customers and growing the biggest library that we can establish.”

Netflix and Blockbuster accounted for the most web sales among online books/music/video retailers ranked in the current Top 500. But other retailers also are moving into more digital forms of entertainment. The third largest company in the category was with 2007 web sales of $477 million, followed by Scholastic Inc. (No. 44) at $397 million; Follett Higher Education Group (No. 68) at $205.3 million; AbeBooks Inc. (No. 73) at $190 million; RealPlayer Music Store (No. 89) at $149.1 million; Alibris Inc. (No. 112) at $113.2 million; Napster Inc. (No. 113) at $111.1 million; and (No. 115 and now part of at $110 million.

In 2007, the biggest five books/music/video retailers exclusive of Netflix and Blockbuster generated a combined average ticket of $71. Web sales and average tickets are rising among online books/music/video retailers because they are introducing even more digital content and adding advanced features and functions that make it easier for consumers to research entertainment products. launched its Barnes & Noble Studio six months ago. The studio features shows about books and authors and has registereded 1 million views. The studio includes user-generated material as well.

Alibris also recently created a set of standardized XML-based application programming interfaces (APIs) that enable online retailers to search through its sellers’ vast inventories and offer Alibris items for sale on their e-commerce sites. Used in recent new business partnerships with sites like Blackwell U.K., Alibris Integration Services enable retailers to dramatically extend their selections and to offer incredible deals on used books, music items and movies.

“We’ve driven sales growth of more than 25% to our sellers this year,” says Alibris CEO Brian Elliott. “In a tough economic climate, we are bolstering impressive sales numbers by delivering superior value to sellers through new services, new business partners and lower fees.”

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