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Summarized by Kent Larsen
LDS Video Magnate Concedes E-Commerce Battle
San Francisco Chronicle 23Jun00 B2
By Carolyn Said: Chronicle Staff Writer
PORTLAND, OREGON -- Mark Wattles, CEO of video store chain Hollywood
Entertainment, conceded the battle for online video sales last week to
Amazon.com and Buy.com. Hollywood closed the e-commerce operations of its
Reel.com subsidiary, but chose to maintain its database of movie reviews,
sending potential customers to former rival Buy.com.
The move ended a 1 1/2 year struggle as Wattles, an LDS Church member, tried
to use Reel.com as his entre into e-commerce. Hollywood bought Reel.com in
October 1998 for nearly $100 million, in spite of the fact that Reel.com had
lost til then $19.8 million on sales of just $9.3 million. Wattles believed
Reel.com would allow Hollywood to leverage its video expertise online,
capturing new customers for the chain.
But the site faced a difficult competitive situation almost from the start.
Just a month after Hollywood bought Reel.com, Amazon.com added videos to its
product mix, and within 45 days it was the number one video retailer on the
web. Like Reel.com, Amazon.com had a database of movie reviews and
information, the Internet Movie Database that it had purchased.
At the same time, Buy.com also launched its video sales operation. Without a
database of reivews, Buy.com pushed its videos with lower prices and a
system that tracked competitor's sites to ensure that Buy.com always had
lower prices. However, unlike Buy.com and Amazon.com, Reel didn't have a
large database of customers of other products, to whom it could cross-sell
its videos, putting it at a significant disadvantage.
Reel.com tried to fight back, announcing in December 1998 that it too would
match the prices of its competitors. But Reel.com also had week technology,
which was unable to track customers from visit to visit, making Reel require
its customers to type-in their name and credit card number each time they
made a purchase. Hollywood was forced to spend millions to fix the problem,
only solving it in August 1999, when it was probably too late.
Hollywood CEO Wattles may also have made some management errors running
Reel.com, according to analysts. When Reel.com founder Stuart Skorman left
the firm after the sale, Wattles chose not to replace him, instead trying to
run the Emeryville, California operation from Hollywood Entertainment's
headquarters in Portland, Oregon. "It was like there was nobody at home,"
said one employee.
Wattles also kept the Reel.com name, instead of joining it to the Hollywood
name to reinforce Reel.com's connection to his existing customers, "Had
Hollywood Entertainment immediately changed Reel's name to Hollywood,
rerouted all the traffic, educated people that it was the same Reel but with
better backing and selection, they would have been able to create greater
marketing synergies between the two companies," said analyst Ken Cassar of
Jupiter Communications.
Reel.com's losses continued to increase, reaching $98.5 million on sales of
$40.2 million in 1999. The discouting wars meant it was losing 13 cents on
each $1 sale, before overhead costs like marketing, staff and offices.
Hollywood's major stockholders, worried that the investment would put
Hollywood itself out of business, started putting pressure on Wattles to
limit the investments in Reel.com.
Early this year, Reel.com stopped participating in the price war, and its
margins improved. But it still lost money in the first quarter of 2000.
Needing cash to continue the operation and unable to take it from Hollywood
because of its major stockholder's opposition, Wattles had filed to sell
stock in Reel.com to the general public in December 1999. But even this was
too late, as pundits suggested that many e-commerce companies didn't have
sustainable business models, and stock offerings were withdrawn. The trouble
at Reel.com had even sunk Hollywood Entertainment's stock, dropping its
price 75 percent, even though the profits from its stores were up 40 percent.
Wattles still hopes that Reel.com can become an important part of
Hollywood's strategy. He hopes the company can become Hollywood's front end
to video on demand, but thinks it will be five to ten years before that will
happen.
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