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Hollywood Buyout Killed Movie Gallery

6 May, 2010 By: Stephanie Prange

Buying your way into growth isn’t always the best plan, as evidenced by the cautionary tale of Movie Gallery, which bought Hollywood Entertainment Corp. after a fierce battle with rival Blockbuster Inc. in 2005. The $1.1 billion acquisition of Hollywood, which included assuming the chain’s $380 million in debt, proved disastrous. That deal was supposed to elevate Gallery from a successful southern rural operation to the national stage, but it ended up sinking the chain in a sea of red ink and ultimately placing it on the dust heap of failed retailers such as Circuit City and Tower Records and Video.

Blockbuster has its own problems with debt from it’s spinoff from Viacom, and no doubt executives now are delighted the chain dodged the bullet of buying Hollywood.

While both chains were duking it out to consolidate the existing brick-and-mortar rental business, Netflix was quietly growing the new subscription rental model and nuturing the idea of video streaming and Redbox was getting into $1 DVD rentals via kiosks at McDonald’s.

Preoccupied with the business of the past, Movie Gallery, in addition to biting off more than it could chew with the acquisition of Hollywood, clung to the old in-store rental model. The chain made tentative moves into video-on-demand with the MovieBeam acquisition and into kiosk rentals. But management seemed too preoccupied with whether or not the next quarter’s slate of titles would pull them out of a slump to look ahead. They were thinking short-term, under pressure from a giant debt load. Renting out store space was a good idea to boost the bottom line, but it wasn’t a long-term solution to a waning core in-store rental business.

Standing still while the competition innovates is not a winning strategy. Making small bets in a fast-changing business proved Gallery’s downfall. But it was ultimately the Hollywood acquisition that kept Gallery from innovating. The chain spent precious time shoring up an old business model, rather than nurturing a new one.

Blockbuster, which is sure to benefit from having fewer brick-and-mortar competition, turns out to have won a small victory by losing its bid to buy Hollywood. But is remains to be seen if that chain, which is also saddled with debt, can keep up with innovators such as Netflix and Redbox.

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