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The Competition is About to Heat Up Even More

14 Jan, 2005 By: Kurt Indvik

So the die has been cast, and Hollywood Entertainment has accepted Movie Gallery's acquisition offer, creating a major No. 2 competitor for Blockbuster.

At this point there is still plenty of ground for both firms to cover with shareholders, the FTC and, looming in the background, the possibility of another try by Blockbuster of snaring its old, if distant, No. 2 rival.

But should a merger go through, it would likely means less overlap in market coverage (Movie Gallery having a largely rural market strategy and few stores on the West Coast) and therefore fewer Hollywood or Movie Gallery store closings overall. I suppose for the independent video retailer this cannot be viewed as positively as if, instead, Blockbuster and Hollywood merged; certainly we would see more store closings in overlapped markets.

We'll also probably be saying goodbye to Mark Wattles, the sometimes embattled, but largely well respected business operator who founded and grew Hollywood to national chain status over these many years. How his Portland, Ore.-based operation, which is supposed to remain largely intact in the deal, integrates and operates without its founding father will be an interesting challenge for Movie Gallery chief Joe Malugen and his senior staff. Meanwhile, Wattles is already building his next opportunity, having just assumed the position of chairman of the board of Ultimate Electronics, upon the purchase of more than 31 percent of the company's shares.

Of course the natural assumption is that there will be economies of scale in any merger of this size, and where and how Malugen extracts them will be something we'll all have to wait and see over the course of 2005. Will this new, bigger No. 2 respond to Blockbuster's much hyped and fairly crafty “no late fees” marketing scheme? Will whatever price discounts Malugen can extract from suppliers be translated into more competitive rental fees and sales pricing?

Whatever happens, my bet is the competition between the two remaining major public chains is going to heat up even more in 2005. Independent retailers had best be on the look out that they don't get scorched in the crossfire.

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