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The Mating Dance of Video Giants

14 Nov, 2004 By: Kurt Indvik

Speculation was swirling around the industry after last week's announcement by Blockbuster that it is eyeing a possible acquisition effort of Hollywood Video.

Was this just a trial balloon to flush out market reaction? Was it a way to try and somehow put a teetering Hollywood on its heels as it tries to secure private financing and become a privately held company once again? By making an “offer” (and I put that in quotes because it doesn't appear to be a formal offer as yet) higher than the one currently being offered by Leonard Green & Partners to take Hollywood private, Blockbuster may be destabilizing Hollywood's and Wattles' efforts.

We're a long way from this deal getting to any formal state, if it ever does. Until then, we'll all be trying to figure out answers to the following (among other) questions:

• Would the deal to meld the No. 1 and No. 2 (in revenue) retailers in the industry clear antitrust hurdles? Maybe, if the government considers the video rental industry to be in a state of continued decline and/or if they place the deal in the context of the larger picture of online rentals and include such competitors as Wal-Mart. We can expect Movie Gallery and perhaps other video chains to make their case against the merger.

• If the deal goes through, would there be large-scale store closings? Maybe. But the other side of the coin is that a merger would allow Blockbuster significant market coverage to execute its online/brick-and-mortar subscription rental plans so that customers don't have far to go to use a store as a pick up or drop off if they so desire. Also, certain marketing and back-office costs are reduced in a merger, which leads to greater profitability.

And let's not forget the game business. The merger would allow Blockbuster to leverage Hollywood's already significant Game Crazy business and allow it to possibly avoid having to invest in more Game Rush departments of its own in certain markets.

• Would the larger Blockbuster raise its rates once it's eliminated its biggest competitor? Probably, but not drastically. Think about the revenue even a 25-cent raise in the combined chain's average rental rate would bring in. That's a lot of quarters.

There will be plenty of speculation circulation in the coming weeks. I am sure you have your opinions on the above, and plenty of other questions and observations. I'd like to hear them. Send me an e-mail at kindvik@advanstar.com.

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