Best Buy's Next Mistake

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Taking a logical step in digital migration, Best Buy (NYSE: BBY  ) is teaming up with Sonic Solution's (Nasdaq: SNIC  ) Roxio CinemaNow to offer online movie rentals and purchases.

It makes sense on paper. As the undisputed champ of consumer electronics, Best Buy will be able to market the licensed service to its tech-bent shoppers. The CinemaNow platform provides an ideal ecosystem for consumers to watch flicks on Web-blessed devices -- TVs, computers, disc players, smartphones, portable MP3 players, and so on -- that they can buy at Best Buy.

Now take that paper, fold it into an airplane, and throw it out the window.

There are a few things wrong with getting excited about this move. For starters, Best Buy knows how to run a superstore chain, but it's been the Charlie Brown of digital delivery. It's been selling digital music for a couple of years now. When's the last time you bought a download from Best Buy? You may count on the chain for buying an MP3 player, but not for MP3s. It figured it would beef up its digital music reach by acquiring Napster last year. Is Best Buy's digital music storefront or Napster any more popular today than it was a year ago? I don't think so.

Best Buy is also moving into a crowded field where even companies that have video birthrights -- Blockbuster (NYSE: BBI  ) and Apple (Nasdaq: AAPL  ) -- have only had moderate success. Why should Best Buy fare any better?

Why has the mighty Apple fallen short in digital video after mastering digital music? The biggest knock is that consumer demand for premium streams doesn't seem to be there. More and more Internet-tethered home theater appliances are making digital video possible, but couch potatoes appear perfectly content to stream older titles through Netflix (Nasdaq: NFLX  ) at no additional cost or lean on their cable providers for more reliable on-demand viewings.

In other words, there are too many companies fighting for a market that is smaller than they think. Best Buy will have an easel to paint with. It entered into a strategic alliance with TiVo (Nasdaq: TIVO  ) this summer, and it's easy to see Best Buy including a few free CinemaNow digital rentals with every TiVo purchased. However, promos will likely provide brief -- and temporary -- publicity pops. At the end of the day, Best Buy will be just another big fish in a shallow pond.

The only upside for Best Buy here is that it will be receiving Sonic Solutions warrants for championing its platform. There may be little fundamentally exciting about Sonic Solutions, but its stock has been a 10-bagger since bottoming out in March. You don't look a handful of free lottery tickets in the mouth.

I'm sorry, Best Buy. Cinema? Now?

Apple, Best Buy, and Netflix are Motley Fool Stock Advisor recommendations. Best Buy is a Motley Fool Inside Value pick. The Fool owns shares of Best Buy. Try any of our Foolish newsletters today, free for 30 days.

Longtime Fool contributor Rick Munarriz can watch time fly at a consumer electronics store. He's a gadget geek that way. He owns shares in Netflix and TiVo. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.

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