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Movie Gallery Train Wreck Not Unexpected

9 Feb, 2010 By: Thomas K. Arnold

Movie Gallery's second bankruptcy filing in three years was hardly unexpected. The rental chain, No. 2 behind Blockbuster, was a train wreck waiting to happen.

I remember years ago, when the business first shifted toward sellthrough and Blockbuster was facing all kinds of problems. Movie Gallery financials were remarkably stable, and executives with the chain gloated that customers of their video rental stores, primarily in rural areas in the South and Midwest, were perfectly content with the traditional rental model and didn't seem inclined to change their ways.

For awhile, that held true, but eventually prices for hot new DVDs got lower and lower, making them increasingly attractive as a purchase item. At the same time we saw new ways to rent movies emerge, first Netflix and then Redbox, that offered such convenience and simplicity that even the good old boys (and gals) who frequented Movie Gallery stores were enticed to switch.

Blockbuster is in pretty much the same boat, but you have to give the No. 1 rental chain credit for at least trying. Blockbuster over the last decade has been a hotseat of experimentation, and while its efforts to compete against first the rising tide of sellthrough discounters and then the new breed of video rental services haven't exactly panned out the way executives might have hoped, at least Blockbuster still has a stake in the game. Blockbuster might be battered and bruised, but it is still a player.

Movie Gallery, on the other hand, has done practically zilch in the innovation category — and what it has done has been too little, too late. Remember the ill-fated purchase of MovieBeam, the download service birthed in 2003 by the Walt Disney Co.? Disney unloaded it just two years later after failing to make any significant inroad into the market, due to the relatively high price and cumbersome method of piping movies into the home. For two aimless years, MovieBeam wandered on its own, only to be snatched up by Movie Gallery in 2007 when it already was on life support.

Now it's Movie Gallery's turn to be hooked up to the machine, and the prognosis certainly doesn't look good. The chain is immediately closing 760 stores and warns it "anticipates" closing more stores. Revenue in 2009 fell by a staggering $550 million, or nearly 30%, to $1.4 billion. And the chain's fourth-quarter operating loss grew to $129 million in 2009 from $84.8 million in 2008.

I hope Movie Gallery somehow manages to pull through and will once again complete a successful reorganization plan, as it did in 2007. But even it does, I'm afraid the chain will be living on borrowed time unless it somehow manages to develop and implement an entirely new business model.

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