Following closely in Blockbuster Video’s footsteps, Hollywood Entertainment Corp. said Thursday up to $35 million is being invested in its online vidtailer Reel.com to pave the way for No. 2 homevid rental chain Hollywood Video to begin distribbing its movies on demand over the Internet.
Helping out is a $20 million investment in Reel.com by billionaire Ron Burkle’s Yucaipa Cos., a fund which has been affiliated with management mogul Michael Ovitz’s stakes in a varied portfolio of dot-coms.
The rest of the financing for the Hollywood Entertainment-owned dot com will come from outside investors.
Yucaipa also owns 50% of Ovitz backed e-tailer CheckOut.com and a stake in e-tailer DVDExpress.com.
In its first stages of shifting efforts away from solely the title rental biz, Reel.com said it has pacted with Sprint to provide movies and a consumer interface for Sprint’s Internet-based video-on-demand service readying for rollout on PCs, cable set-top boxes and television sets.
Sprint has been testing the VOD service with a limited number of movies for several months over its high-speed fiber-optic Internet connections and cable set-top boxes in Pacifica. The service provides users full VCR functionality, including the ability to pause, fast-forward and rewind movies similar to a TiVo or Replay set-top box.
The telco giant plans to incorporate the VOD system, using Reel’s interface, into its new set-top boxes in April.
Negotiating with studios
Reel is negotiating pay-per-view rights from the studios, according to Mark Wattles, chairman of Hollywood Entertainment. Movies would become available over the Sprint service at the same time they appear on cable TV-based pay-per-view services.
Revenues will be split between Hollywood and Sprint, with the studios’ license fee coming out of Hollywood’s portion.
“We don’t really care what the revenue split is at this point and, frankly, I doubt the studios do either,” Wattles said. “We’re trying to learn, just like they are. The revenue isn’t going to be pretty small at first.”
Blockbuster unveiled similar plans for a VOD offering with digital video recorder service TiVo in December. It also plans to distrib pics through its blockbuster.com Web site, with MGM saying it will help create the technology and offer titles from its library.
Wattles said additional VOD moves by Reel.com are likely to be announced over the next few months.
The Sprint deal should boost prospects for Reel.com’s long-anticipated initial public offering, set for the middle of this year.
Separately, Hollywood Entertainment reported a net loss of $24.9 million for the fourth quarter, ended Dec. 31, compared to a net loss of $69.9 million a year ago, after funding losses from Reel.com.
Including Reel.com, losses for the year amounted to $51 million. The company’s bricks and mortar division had net earnings of $14.5 million for the quarter, compared to $11.7 million last year. Cash flow for the quarter was $53 million, compared to $41.7 million last year.
Net earnings at its stores for all of 1999, was $47.9 million, a gain of 4%.