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Posted 24 Feb 2001   For week ended June 25, 2000
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Sent on Mormon-News: 29Jun00

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 and Hollywood closed the e-commerce operations of its subsidiary, but chose to maintain its database of movie reviews, sending potential customers to former rival

The move ended a 1 1/2 year struggle as Wattles, an LDS Church member, tried to use as his entre into e-commerce. Hollywood bought in October 1998 for nearly $100 million, in spite of the fact that had lost til then $19.8 million on sales of just $9.3 million. Wattles believed 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, added videos to its product mix, and within 45 days it was the number one video retailer on the web. Like, had a database of movie reviews and information, the Internet Movie Database that it had purchased.

At the same time, also launched its video sales operation. Without a database of reivews, pushed its videos with lower prices and a system that tracked competitor's sites to ensure that always had lower prices. However, unlike and, 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. tried to fight back, announcing in December 1998 that it too would match the prices of its competitors. But 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, according to analysts. When 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 name, instead of joining it to the Hollywood name to reinforce'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.'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

Early this year, 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 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 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 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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