Tuesday, June 19, 2007

Blockbuster to favor Blu-ray over rival HD DVD format


By Associated Press LOS ANGELES - Blockbuster Inc. will rent high-definition DVDs only in the Blu-ray format in 1,450 stores when it expands its high-def offerings next month, dealing a major blow to the rival HD DVD format.

The move, being announced Monday, could be the first step in resolving a format war that has kept confused consumers from rushing to buy new DVD players until they can determine which format will dominate the market.

Blockbuster has been renting both Blu-ray and HD DVD titles in 250 stores since late last year and found that consumers were choosing Blu-ray titles more than 70 percent of the time.

"The consumers are sending us a message. I can't ignore what I'm seeing," Matthew Smith, senior vice president of merchandising at Blockbuster, told The Associated Press.

Blockbuster will continue to rent HD DVD titles in the original 250 locations and online, the Dallas-based company said.

The decision was helped in large part by the lopsided availability of titles in Blu-ray, Smith said. All major studios except one are releasing films in Blu-ray, with several, including The Walt Disney Co., releasing exclusively in Blu-ray. Only Universal Studios, which is owned by General Electric Co., exclusively supports HD DVD.

Warner Bros., a unit of Time Warner Inc., and Paramount Pictures, which is owned by Viacom Inc., release films in both formats.

"When you walk into a store and see all this product available in Blu-ray and there is less available on HD DVD, I think the consumer gets that," Smith said.

The rollout of Sony Corp.'s PlayStation 3 game console, which comes standard with a Blu-ray drive, also helped give the format momentum, Smith said.

Blockbuster's decision, while significant on it's own, could boost Blu-ray even more if other retailers follow suit.

"It will help shift the balance toward Blu-ray, clearly," said Richard Doherty, president of The Envisioneering Group, a research company.

The North American HD DVD Promotional Group said Blockbuster's decision was shortsighted and skewed by the success of films released by Blu-ray studios in the first three months of the year. The group said HD DVD has since gained momentum, selling more players and popular titles such as "The 40-Year Old Virgin" and "The Matrix" trilogy.

"I think trying to make a format decision using such a short time period is really not measuring what the consumer is saying," said Ken Graffeo, co-president of the group.

The two formats have been battling it out since they both hit the market last year. Studios hope the high-definition discs, with their sharper picture and more room for interactive special features and games, will replace standard definition DVDs.

The formats are incompatible and neither will play on standard DVD players, although standard DVDs can be viewed with either a Blu-ray or HD DVD player.

The Blu-ray camp has been helped by the release of such huge hits as "Casino Royale," "Pirates of the Caribbean" and "Spider-Man" coming out exclusively in its format.

As the battle has unfolded, the price of the high-definition players needed to show the movies has plummeted. Toshiba Corp., the major supporter of HD DVD, is selling its player for $299 with a rebate, down from $499 when it first went on sale.

Sony, which is pushing Blu-ray, recently slashed the price of its player by more than half to $499. The player retailed for $1,000 when it first was introduced.

Home Depot Agrees to Sell Supply Unit for $10 Billion


Three Private-Equity Firms to Take Equal Stakes
By ANN ZIMMERMAN and DENNIS BERMAN

A trio of investors agreed to buy Home Depot Inc.'s wholesale construction supply business for a tad more than $10 billion, according to people close to the deal.

The investors are Bain Capital LLC, Carlyle Group L.P. and Clayton, Dubilier & Rice Inc., which will each have a one-third stake in the business. A Home Depot spokesman declined to comment on the deal.

Home Depot, the country's largest home-improvement retailer by sales, wants to sell the division in an effort to put more money and effort into rejuvenating customer service, staff morale and sales at its chain of more than 2,100 retail stores.

Analysts also expect it would allow Home Depot to return the sale proceeds to shareholders in the form of a major share repurchase or dividends. Since the first of the year, Home Depot's stock has slid almost 8% as it struggled to jumpstart sales amid a sharp slowdown in the housing sector.

The price is about what analysts had expected in late spring as the housing market remained depressed. But earlier in the year, when CEO Frank Blake first announced the company was considering strategic alternatives for the business, estimates were as high as $13 billion.

Under controversial former CEO Bob Nardelli, Home Depot built the wholesale construction supply business through nearly 40 acquisitions valued at nearly $7 billion over the last few years. HD Supply sells infrastructure and maintenance products to builders, municipal systems and other businesses, generating about 13% of Home Depot's sales in fiscal 2006 but delivering 80% of sales growth.

Initially, Mr. Nardelli saw the supply business as a way to counter the dips in the cyclical housing market, but in fact the supply division sold to home builders as well. Shareholders began to see it as a distraction, siphoning off funds needed to improve staffing, renovations and computer systems at its stores. In recent years, Home Depot's sales at stores open at least a year trailed those at its smaller, but faster-growing competitor Lowe's Corp., although that gap has narrowed in recent months.

--Mary Ellen Lloyd contributed to this article.

Bristol And Sanofi Still Shouldn't Merge

Matthew Herper (Reuters)

Peter Dolan, the disgraced former chief executive of Bristol-Myers Squibb, should have stuck to his guns.

Dolan was ousted after he botched negotiations with generic drug firm Apotex over the blood thinner Plavix, the second-biggest drug in the world, with annual sales of $6 billion. Even though Bristol (nyse: BMY - news - people ) splits profits for the $4-a-day pill with Sanofi-Aventis (nyse: SNY - news - people ), the drug is still a major source of earnings. To hold on to it, Dolan cut a deal meant to keep Apotex at bay. Instead, Apotex took advantage of the fine print to launch its generic anyway--without the threat of substantial penalties.

Today a federal New York judge ruled that the patent on Plavix is still valid and said Sanofi (Plavix's inventor) was entitled to an injunction to keep Apotex from launching a copycat. In other words, Dolan could have just dug in and waited for the ruling.

Now that it is clear that Bristol and Sanofi are going to keep the rights to their big seller, expect a new round of speculation that the two companies should merge. After all, Sanofi could use some help: its much-touted obesity pill Zimulti, once hyped as potentially the biggest drug ever, was unanimously panned by a panel of doctors advising the U.S. Food and Drug Administration, paving the way for an eventual rejection.

But such a deal didn't make sense when rumors of negotiations surfaced in February (see "Why Bristol and Sanofi Shouldn't Merge"), and it doesn't make sense now.

A sale by Bristol would run the risk of derailing the company's pipeline.

Bristol-Myers recently launched medicines for rheumatoid arthritis and leukemia, and just today it was granted a fast FDA review for a new chemotherapy for breast cancer. Treatments for diabetes and breast cancer are in development.

Sanofi-Aventis, by contrast, seems to be chronically overestimating its medicines. The failure of Zimulti (formerly known as Acomplia) resulted partly from the company's decision to study the drug mainly in obesity trials where many patients dropped out, making it more difficult to judge the drug's risks. Worse, Sanofi insisted that the side effects of depression and anxiety were manageable. Looking at the same data, the FDA saw a risk of suicidal thoughts. The FDA also rejected another medicine, for heart rhythm problems.

If Sanofi was going to buy Bristol, the time to do it was before the Plavix ruling and before Zimulti was deep-sixed. Now, Bristol could look attractive to other pharmaceutical companies, like AstraZeneca (nyse: AZN - news - people ), GlaxoSmithKline (nyse: GSK - news - people ) or Pfizer (nyse: PFE - news - people ), leading to a bidding war. Moreover, the company, under new chief James Cornelius, seems to be on a pretty even keel. It doesn't have to sell to anyone.

A deal might be bad for Sanofi too. Big drug company mergers have a lousy track record for creating value. Pfizer's mega-mergers haven't generated a steady stream of new blockbusters. In fact, that drug giant went nearly a decade between blockbuster drugs (see "Pfizer's New Blockbuster Drug"). Glaxo and Astra have experienced similar droughts.

There does seem to be a treatment for drug industry malaise: crisis. For a while, Bristol was the poster child of big patent expirations, bad behavior and failed potential blockbusters (before the failures of Zimulti or Pfizer's good cholesterol drug, torcetrapib, there was Bristol's unapprovable heart pill Vanlev.)

But those troubles led to a more spare company, focused on smaller but more lucrative markets like cancer and rheumatoid arthritis. Similarly, Merck (nyse: MRK - news - people ) has done well since the Vioxx debacle, launching big drugs like Januvia for diabetes and Gardasil to prevent strains of the virus that causes cervical cancer.

Before they look to dilute their shares through a desperate deal, Sanofi executives should take a good look in the mirror and figure out how to do better with the large company they created through a gigantic merger just three years ago, when Sanofi-Synthelabo bought Aventis for $64 billion.

New age town embraces dollar alternative


By Scott Malone (Reuters)

GREAT BARRINGTON, Massachusetts (Reuters) - A walk down Main Street in this New England town calls to mind the pictures of Norman Rockwell, who lived nearby and chronicled small-town American life in the mid-20th Century.

So it is fitting that the artist's face adorns the 50 BerkShares note, one of five denominations in a currency adopted by towns in western Massachusetts to support locally owned businesses over national chains.

"I just love the feel of using a local currency," said Trice Atchison, 43, a teacher who used BerkShares to buy a snack at a cafe in Great Barrington, a town of about 7,400 people. "It keeps the profit within the community."

There are about 844,000 BerkShares in circulation, worth $759,600 at the fixed exchange rate of 1 BerkShare to 90 U.S. cents, according to program organizers. The paper scrip is available in denominations of one, five, 10, 20 and 50.

In their 10 months of circulation, they've become a regular feature of the local economy. Businesses that accept BerkShares treat them interchangeably with dollars: a $1 cup of coffee sells for 1 BerkShare, a 10 percent discount for people paying in BerkShares.

Named for the local Berkshire Hills, BerkShares are accepted in about 280 cafes, coffee shops, grocery stores and other businesses in Great Barrington and neighboring towns, including Stockbridge, the town where Rockwell lived for a quarter century.

"BerkShares are cash, and so people have transferred their cash habits to BerkShares," said Susan Witt, executive director of the E.F. Schumacher Society, a nonprofit group that set up the program. "They might have 50 in their pocket, but not 150. They're buying their lunch, their coffee, a small birthday present."

Great Barrington attracts weekend residents and tourists from the New York area who help to support its wealth of organic farms, yoga studios, cafes and businesses like Allow Yourself to Be, which offers services ranging from massage to "chakra balancing" and Infinite Quest, which sells "past life regression therapy."

LOCAL PRIDE

The BerkShares program is one of about a dozen such efforts in the nation. Local groups in California, Kansas, Michigan, New York, Oregon, Pennsylvania, Vermont and Wisconsin run similar ones. One of the oldest is Ithaca Hours, which went into circulation in 1991 in Ithaca, New York.

About $120,000 of that currency circulates in the rural town. Unlike BerkShares, Ithaca Hours cannot officially be freely converted to dollars, though some businesses buy them.

Stephen Burkle, president of the Ithaca Hours program, said the notes are a badge of local pride.

"At the beginning it was very hard to get small businesses to get on board with it," said Burkle, who also owns a music store in Ithaca. "When Ithaca Hours first started, there wasn't a Home Depot in town, there wasn't a Borders, there wasn't a Starbucks. Now that there are, it's a mechanism for small businesses to compete with national chains."

U.S. law prevents states from issuing their own currency but allows private groups to print paper scrip, though not coins, said Lewis Solomon, a professor of law at George Washington University, who studies local currencies.

"As long as you don't turn out quarters and you don't turn out something that looks like the U.S. dollar, it's legal," Solomon said.

FULL CIRCLE

The BerkShares experiment comes as the dollar is losing some of its status on international markets, with governments shifting some reserves into euros, the pound and other investments as the U.S. currency has slid in value.

But the dollar is still the currency that businesses in Great Barrington need to pay most of their bills.

"The promise of this program is for it to be a completed circle," said Matt Rubiner, owner of Rubiner's cheese shop and Rubi's cafe. Some local farmers who supply him accept BerkShares, but he pays most of his bills in dollars.

"The circle isn't quite completed yet in most cases, and someone has to take the hit," Rubiner said, referring to the 10 percent discount. "The person who takes the hit is the merchant, it's me."

Meanwhile, Berkshire Hills Bancorp Inc., a western Massachusetts bank that exchanges BerkShares for dollars, is considering BerkShares-denominated checks and debit cards.

"Businesses aren't comfortable walking around with wads of BerkShares to pay for their supplies or their advertising," said Melissa Joyce, a branch officer with the bank, which has 25 branches, six of which exchange BerkShares. "I do hope that we're able to develop the checking account and debit card, because it will make it easier for everyone."