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Analyst: $750M DVD Rental Biz Up for Grab With Gallery Closure

3 May, 2010 By: Erik Gruenwedel

With bankrupt Movie Gallery/Hollywood Video/Game Crazy slated to begin liquidation of more than 2,400 stores over the next months, the chain’s $750 million DVD/Blu-ray Disc movie rental market cut will be up for grab, an analyst said.

Wilsonville, Ore.-based Gallery April 30 informed stores it would initiate liquidation sales in about two-to-three weeks, according to personnel contacted at numerous locations.

Gallery, which filed for bankruptcy a second time in February, hasn’t officially commented on the issue. It also remains unclear how the possible switch from Chapter 11 to Chapter 7 bankruptcy would affect Gallery’s 184 Canadian stores, which are not part of the original bankruptcy.

Eric Wold, analyst with Merriman Curhan Ford in New York, said there is an average of about 27 Redbox rental kiosks within five miles of a Gallery or Hollywood Video location.

By comparison there are three-to-four Redbox kiosks within a five-minute radius of a Blockbuster video store.

“We continue to believe that Redbox would be a more likely beneficiary of store closures than Netflix due to Netflix’s inability to satisfy real-time DVD demand for new releases,” Wold said in a note.

It should be noted that with the exception of distribution agreements with Paramount, Sony Pictures Home Entertainment, Lionsgate and Summit Entertainment, among others, Redbox has the same 28-day delay for new release titles that Netflix has.

Wold said that unlike Blockbuster customers that tend to frequent other Blockbuster locations when a local store closes, he doubts Gallery customers will flock to Blockbuster due to its declining store base.

“We estimate that for every 10% of Movie Gallery’s DVD rental revenue that Redbox acquires, [parent] Coinstar could experience an annual revenue boost of 5%, with $13 million plus in incremental [pre-tax earnings],” Wold said.

Regardless, Blockbuster shares were up more than 18% in midmorning trading; Netflix was up about 3%. 

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