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VOD Announcement Cools Hot Video Stocks

28 Aug, 2001 By: Joan Villa

Red-hot video stocks were dampened Monday by an article in financial weekly Barron's that questioned Blockbuster's long-term growth potential in light of the recently announced five-studio deal for video-on-demand delivery over the Internet.

By market close on Aug. 27, the day the article appeared, Movie Gallery's share price dropped $3.55, or 11.3%, to $27.75, and Hollywood Entertainment Corp. shed 34 cents to $12.02. Blockbuster slid 7.3%, or $1.60 per share, to $20.35, in what Blockbuster spokesman Randy Hargrove called “short sellers trying to beat the drum of a tech threat.”

Hargrove echoed c.e.o. John Antioco's comments in the article that the nation's No. 1 rental retailer does not see VOD as a significant threat to rental revenues. “We believe it is still far off into the future,” Hargrove reiterates. “We did our VOD trials and we learned a lot, and one of the things we learned is that a viable model for VOD is even further away than we thought.”

Analyst Tom Adams of Adams Media Research projects over the next 10 years “relatively flat” growth for home video even with the rapid adoption of DVD, compared to “fairly decent VOD growth from here on in” that could reach $3 billion in 2003 and close to $6 billion 10 years out from all electronic delivery combined.

As for Internet downloading, costs have dropped quickly enough to create a viable business at “fairly low revenue figures,” he says, while actual consumer adoption and buy rates will “take a while” to develop. He notes that in the interim Blockbuster could benefit from the lower margins presented by DVD, making this stock set-back just a temporary slump.

“For going on 15 years we've watched Blockbuster's stock get hammered by the occasional VOD threat article, and that's represented a good buying opportunity at each of those previous occasions,” Adams adds. “Only time will tell if this is one of those occasions or not.”

Near the close of market Tuesday, Blockbuster had rebounded 99 cents to $21.34, Hollywood rose 9 cents to $12.11, and Movie Gallery was down $1.84 to $25.91.

“Investors are looking for stocks with growth potential and good cash flow generation and we've got those,” insists Hargrove.

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