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Turf Wars: The Game's the Thing

23 Nov, 2004 By: Holly J. Wagner

I pretty much figured we would be in a price war by this time this year, but I didn't expect such major turf wars.

Price battles were easy to figure. You can't have that many big players getting into online rental without someone trying to make the offer cheap enough for people who have never considered renting online to try it. Now Wal-Mart's ad for Black Friday says it will, for a limited time, offer major studio catalog titles for $3.88 each. If they have holiday classics like Miracle on 34th Street (or even Ernest Saves Christmas) in there, I would expect those titles to stop renting anywhere near a Wal-Mart, because finally it actually does cost less to buy than rent.

But all this business about major rentailers trying to grow in a shrinking market — by buying out a competitor, of course — caught me a little off guard. Maybe it shouldn't have. As our executive editor Stephanie Prange has said, the only way to grow in a shrinking market is to gain market share.

In that way, I guess it makes sense for Blockbuster to go after Hollywood. But it would still mean shedding a lot of suddenly duplicative leases after a transaction, just to get those Big Blue hands on a lot of inventory, a few choice locations and — the jewel in the crown, methinks — 600 Game Crazy stores that would more than double Blockbuster's presence in the U.S. video game market. Some of you might not recognize the game market. You've all watched an industry shrink for so long you might not recognize a business when it's actually growing. Blockbuster does.

On the other hand, it makes much more sense for Movie Gallery. The chain's store count thins out noticeably as you move north and west of its home base, to the point that Movie Gallery has two stores in California and three I could find in Oregon, plus a handful of Video Update stores it owns in Washington. Buying a West Coast-based chain the size of Hollywood would take Gallery's presence national overnight, in good locations. The chain could also challenge Blockbuster by offering adult titles where zoning permits, as it does with its existing stores. (I understand Blockbuster is offering adult product in some of the smaller chains it has bought up, including the Video Hut outlets recently purchased from Tom Warren).

Finally, the Department of Justice is likely to cast a more favorable eye on a Hollywood-Movie Gallery marriage for two reasons: one, the geography — I think the DoJ is much more likely to approve a deal that will maintain the competitive status quo in those western states, as opposed to one that would effectively wipe out chain competition in them; and two, I think the DoJ would prefer a deal that snowballs the No. 2 and No. 3 chains into a more powerful No. 2 to one that would merge No. 1 and No. 2 into a behemoth four times the size of its next closest competitor.

But who knows? If the DoJ considers the video marketplace to be physical stores plus all the other video options available to consumers — including cable, video-on-demand, pay-per-view and Internet — it might look the other way for any possible deal.

There is one more wild card nobody seems to have considered. GameStop has plans to grow its teensy MovieStop chain very quickly. The company is splitting away from its bookstore parent and striking out on its own. If the chain really wants to get into the movie business fast, it may well have the money and the desire to hop in and make a bid.

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