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Cinram to handle digital rights for both music and movies this year

TORONTO - Worldwide CD and DVD manufacturer Cinram International is branching out from its base in physical disc media with plans to handle digital rights and distribution for both music and movies.

TORONTO - Worldwide CD and DVD manufacturer Cinram International is branching out from its base in physical disc media with plans to handle digital rights and distribution for both music and movies.

Chief executive Steve Brown made the announcement Monday, but insisted that the move wasn't intended to show less support for the plastic discs that are the backbone of its business.

"Cinram is a supplier and a deliverer of media, and as that (digital rights) metamorphosis comes, we will be doing it," Brown said.

"We're not being pioneers in this. What we will be rolling out is a digital method that works and works well."

Brown declined to elaborate any further, saying that financial details would be revealed in the next two months, along with specifics on how exactly Cinram International Income Fund (TSX:CRW.UN) would handle digital content.

He described digital rights management as simply another method of consumer delivery and, like Cinram puts digital content onto DVDs and CDs, the new rollout would simply be another — albeit, virtual — package for entertainment.

"We've been developing this for the last 12 months and when we roll it out it will be a good, solid business model and it will be accretive to the value of Cinram and its shareholders," Brown said.

Cinram has a diverse roster of clients including Universal's film and music divisions, Fox Home Entertainment, MGM, and Lions Gate Entertainment.

However the company has been forced to contend with a downturn in the sale of CDs and DVDs in recent years that has cut into disc orders, an effect that will be compounded by the loss of a major customer this summer.

The Toronto-based fund announced in February that Warner Home Video planned to end its contract with the Canadian manufacturer, effective July 31. Warner represented 28 per cent of Cinram's revenue in 2008.

When Warner said it would bail, Cinram's stock began a freefall from which it hasn't recovered, dropping more than 60 per cent on the day of the announcement.

On Monday, the company's stock was up three cents, or 2.7 per cent, to $1.15 on the Toronto Stock Exchange in low volume trading. Cinram stock has a 52-week high of $3.31 and a low of 91 cents.

Digital content has become an increasingly large part of the entertainment business with Apple's iTunes and competitor Puretracks in Canada offering a variety of content from movies and television shows to music.

Some critics have suggested that the market's growth has been hindered partly because of the lack of options consumers have when they buy a digital file.

Viewers may sometimes want to watch their digital downloads on their computers, and other times on their television sets, but the data files are often locked down with strict encryption technology by movie studios or record labels who fear piracy will hurt sales.

"The key to selling digital files is to make them as portable as a DVD," said Jan Saxton, a film entertainment analyst at Adams Media Research in California.

"If you buy it and it's going to reside on your computer and you can't put it anywhere else... people won't do it."

That's where Cinram could step in, offering studios a more reliable foundation and a digital standard that could be sold to the entire industry.

The technology could provide the struggling Cinram with a new way to boost earnings, as the sales of CDs continue to dwindle and DVDs slide off a sales boom that petered out just before the economy faltered.

"Digital rights management and distribution will be a major part of this company's reinventions into the future," Brown told shareholders at the company's annual meeting on Monday.

He said while the move will broaden the slate of products Cinram offers, and isn't intended to distract from the company's main business. Brown said Cinram still believes there is 10 to 15 selling years left in physical media discs.

He also told investors that the company now has the capability to produce high-definition 3-D Blu-Ray discs, a product that is relatively new to the home entertainment market.

This isn't the first time Cinram has branched off from its main business. In 2007, the company inked a packaging and distribution agreement with Motorola for its mobile phones.

Brown told shareholders that the company has a history of reinventing its operations to keep pace with the latest technologies. The CEO noted that Cinram was once a major vinyl record manufacturer before it moved to cassette tapes, compact discs and video game discs.

However, Salman Partners Inc. analyst Naser Iqbal was skeptical about the latest announcement, mostly because he said the company has bigger problems, including debt that's due next spring.

"I think there are deep problems with the company," he said in an interview, noting his 50 cent target price and "sell" rating.

"Any new initiatives will take time, will cost expenses and I think they have some very immediate concerns they have to address."

In the first quarter, Cinram posted a US$7.9-million profit as it overcame a loss of $22.3 million a year earlier on cost cutting. The company also sold off its distribution centre in Simi Valley, Calif. last January for $14 million.

Cinram employs about 13,000 workers at plants in the United States, Mexico, France, Britain and Germany.

 
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