(FORTUNE Magazine) – GARY ARNOLD STARTS HIS DAY LIKE any other show business executive; he reads Variety, the Hollywood Reporter, and the occasional movie script. He casually mentions a recent meeting with Alan Horn, the president of Warner Brothers, and an upcoming one with Peter Chernin of News Corp., which owns 20th Century Fox. He's on the nominating committee for the Rock and Roll Hall of Fame.

But Arnold is nowhere near Hollywood, and he doesn't work in the movie business. He works for Best Buy, the electronics chain. He decides which movies will be stocked at the chain's 650 stores. And in the new, DVD-dominated movie business, that makes him a real player. "I'm not picking up the phone and making suggestions about scripts," he says. "But we're closest to the consumers. So when the creative people are rolling their cameras, we've giving them that perspective. It's a constant dialogue."

As the DVD has exploded in popularity, Best Buy, along with Wal-Mart, Target, Circuit City, Costco, and Sam's Club, have become the most important distribution channels for the movie business. U.S. consumers spent $11.6 billion on DVDs in 2003, but just $9.2 billion at the box office, according to the Digital Entertainment Group, a consumer electronics and movie industry consortium dedicated to promoting the DVD. The vast majority of DVDs were sold at those six "big box" retailers. Sixty percent alone were sold by Wal-Mart, Best Buy, and Target, according to the retailing consultant NPD Group.

Those figures have dramatically changed the balance of power in Hollywood. Reps like Arnold, once consigned to dealing exclusively with home-video executives, now meet with CEOs, producers, and directors to find out what a studio is producing and with whom. "By the time you've greenlighted a picture, it takes two years to bring it to market," says Ken Markman, a longtime studio marketing consultant. "So you have to know who your promotional partners are and have them sitting at the table to help the marketing team decide whether they can afford the movie."

Jeffrey Katzenberg may have been the first big Hollywood executive to publicly proclaim his love for retailers. When DreamWorks' Shrek DVD came out in 2001, he produced a video of the monster doing the Wal-Mart cheer--and showed up at the company's Arkansas headquarters and shouted the cheer out himself. Nowadays such efforts are commonplace. Best Buy helped promote Revolution Studios' Hellboy before it hit theaters this past spring, handing out a DVD trailer for the comic-book adaptation. "We go to the retailers a year early and say, 'Here's what the movie's like,' and bring in the director, who shows them the value of the movie," says Mike Dunn, president of Fox Home Entertainment. "Twelve to 18 months before the release, you talk about the story line, and the cast, and the producer. We're in constant contact,'' says Pam Kelly, executive vice president of sales at New Line Home Entertainment (which, like FORTUNE, is owned by Time Warner).

Indeed, these days there isn't a movie mogul around who can't discuss the finer points of just-in-time inventory. "We're a consumer-goods industry now," says Steve Beekman, president of Lions Gate Entertainment. Predictably, not everyone is thrilled with the new arrangement. "I'm not sure this is great for the content," says one veteran home-video executive. "If Wal-Mart is determining the preferences of the country, you could say that the red states are deciding what movies will be made." But ultimately it might be technology rather than matters of taste that shifts power away from retailers. DVD sales are expected to slow with the rise of video-on-demand (not to mention illegal downloads). In that case Microsoft, Comcast, Yahoo, or anyone else offering VOD will call the shots--and studios will have a new generation of masters to please. -- Evelyn Nussenbaum