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Movie Gallery CEO Downplays VOD Threat to Rental

26 Feb, 2004 By: Erik Gruenwedel

Calling home video, the “goose that laid the golden egg,” Movie Gallery chairman, president and CEO Joe Malugen told analysts at the 10th Bear Stearns retail conference that efforts by movie studios to expand video-on-demand (VOD) and pay-per-view services are overblown.

“The VOD people make somewhat of a ‘tail wagging the dog argument' in that VOD is a $500 million business as opposed to $15 billion [return by the studios] in home video,” said Malugen. “The margins are essentially the same, but [the studios] have no real interest to cannibalize the $15 profit they make on the sale of a DVD versus the potential for $2.50 on pay-per-view or VOD.”

He estimated that VOD would reach up to $3 billion in revenue by 2010 compared to $35 billion in home video.

Movie Gallery operates more than 2,100 primarily leased retail locations in rural and secondary markets in the United States, Canada and Mexico.

Malugen said that with the advent of a high-definition DVD and player, consumers will not be interested in downloading movies that have six times less the picture quality.

“There exists no broadband capability that will allow large quantities of movies to be downloaded in high-definition format,” Malugen said. “You're going to go down to the video store to [get] your new movie.”

He reiterated that the studios derive 56 percent of their revenue from home video, compared to 22 percent and 2 percent from theatres and VOD, respectively.

As an example, Malugen said Movie Gallery purchased 744 titles last year, of which 700 grossed less than $80 million individually at the box office.

“Most of those movies were essentially losers,” he said, citing a film's theatrical return vs. its initial creative and marketing costs. “That's how we judge the quality of the film.”

Malugen said the only substantial revenue source for the majority of films released by the studios is in home video.

“Without that revenue, the studios are out of business, period,” he said. “End of story.”

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