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Video Retail Stocks in Eye-Popping Turnaround

14 Jun, 2001 By: Hive News

The three leading U.S. video retailers are providing investors with dramatic returns this year.

Shares of Blockbuster have nearly tripled since December. No. 2 chain Hollywood Entertainment has gained more than 500%. No. 3 Movie Gallery is up more than 300%.

These results are rather startling, considering the industry's recent troubles. Last week, HollywoodEntertainment restructured its hefty bank debt to avoid imminent default. Less lucky, West Coast Video filed for bankruptcy liquidation in March, while Video Update hasoperated under bankruptcy court protection since September.

The prime answer is DVD and, to a lesser extent, VOD prospects.

DVD business is exploding as consumers embrace the format. Sales and rentals of DVDs are rising even as videotapesexperience declines in both sales amd rentals, according to Adams Media Research. Adams says that DVD this year will account for a third of this year's retail video market, and estimates there will be about 25 million DVDhouseholds by the end of the year, about double last year's level.

For video stores, the economics are better for DVD than for tapes. Hot rental tapes are priced about $40 and above on a per-item or revenue-sharing basis, while DVD is priced between $15 to $20 per unit.

Video-on-demand, until recently considered a threat to the movie-rental business, has slowed its march to the launchpad.

Blockbuster backed off from its VOD deal with Enron when escalating costs were not met by film studio licensing deals for new video releases. The studios are also reluctant to further empower Blockbuster, which likes to throw the weight of its 4,800 stores around to pressure the studios into deals they don't really want or need to make with the rental giant.

Hollywood Entertainment bought Reel.com for $100 million hoping the site would offer movie downloads over the Internet. But, today, Reel.com is a site publishing movie reviews.

Downloading movies requires bandwidth that most people don't have yet. And, VOD is a very expensive business to develop, from technology to equipment to licensing fees for frontline movies, as Blockbuster experienced firsthand.

The eventual arrival of VOD or a change in the studios' pricing policy that could rob the chains of the higher margins they now enjoy on DVD rentals could have an adverse affect on retail stocks, but it still seems a safe bet thatvideo stores will somehow adapt to these sea changes.

Blockbuster is selling some RadioShack products in its stores. A more stable Hollywood Entertainment expects revenues to increase 5% to 10% this year, and Movie Gallery could begin to push Hollywood Entertainment for the No. 2 spot within the next few years by adding some of bankrupt Video Update's 370 stores to its roster.

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