The second largest video cassette chain in the US, Hollywood Entertainment, with over a 1,000 video stores last week bought the premier video outlet on the World Wide Web, Reel.com which attracts 200,000 visitor a day. The company spent $100 million in stock and cash on the on-line retailer and Hollywood Entertainments shares have surged 12%.
Screen International reports Reel.com's founding investors have agreed to invest in Hollywood Entertainment beyond the stakes they would have received as a result of a direct stock swap instead of just selling out. CMG Information Service, a venture capital fund that acts as an Incubator of Internet start-ups such as Reel.com, in which it has a 34% stake, will now end up as the largest single shareholder in Hollywood Entertainment. Together with Intel, Paul Allens Vulcan Ventures and former vice-chairman of Blockbuster Entertainment, Scott Beck, CMG will invest $67.5m in Hollywood Entertainment by buying stock at discount. The Chief Executive, Dave Wetherell, told Wall Street analysts that the Hollywood Entertainment represented "the future of the living room" and believes that when the growth of video on demand which should hamper a mail order business will in fact benefit it "When video-on-demand becomes a reality . . . cable, telephone and satellite operators will need the front end database and the market intelligence that we have". So CMG's customers will eventually be able to download their video selections onto the Reel.com/Hollywood Entertainment website, once broadband technologies into homes become available.
Although Reel.com are currently receiving 4000 credit card purchases a day which is small compared to Hollywood Entertainments 25 million renters and many on-line consumers using software robots to find the cheapest purchases making brand names less important. Hollywood Entertainment believes the majority of its customers don't know exactly what they want when they go to a video shop and believes the filtering system available on the Reel.com site will assist their customers in making choices if they can be convinced to go on-line.
But there are question also in regard to the stock market valuations of many Internet stocks, at the moment most would appear to be overvalued unless there is the much predicted increase in on-line transactions. Reel.com's operating losses will rise from $10m this year to $20m next year and there are other rivals in the market place such as Video Online Express, Videoflicks, Canada and Amazon which is the Internets most successful on-line seller with 3.1 million customers which is also going to sell movies.
Like everything on the Internet it's all still to play for even if the bubble does burst.
Michael Mc Mahon 13/8/98
