Vet e-tailer Reel shutters online sales

Site to be content-only destination

Reel.com, one of the Web’s best-known movie brands and most venerable e-tailers, is closing its e-commerce operations, according to sources.

Reel parent Hollywood Entertainment could announce as early as today that it is shuttering the online sales aspect of video and DVD e-tailer Reel.com, maintaining the site as a content-only destination for movie-lovers on the Web.

A spokesman for Hollywood declined to comment on any aspect of the story, but sources said that Hollywood execs were meeting over the weekend to finalize an announcement that would include details of the new strategy.

Reel.com had been burning through as much as $5 million per month, sources said.

Hollywood, the nation’s second-largest video retailer, acquired

Reel’s already-recognized e-commerce operation — and brand — nearly two years ago. The company’s decision to end online sales efforts comes only after it had fumbled for a solution to the riddle of Reel: Multimillion-dollar losses could not be stanched and a planned IPO had been delayed due to unfavorable stock market conditions.

$20 mil invested

As late as last month, Hollywood CEO and chairman Mark Wattles said that plans remained on track to complete a $45 million private placement in Reel.com that the company had announced last year. During a May 4 conference call with analysts to discuss the first quarter financials, Wattles said that about $20 million had been invested in Reel at that point.

But planned placements from other investors were delayed due to stock market volatility, Wattles said.

Ultimately, the company had hoped to turn Reel into a self-funding operation that didn’t rely on capital from the parent company. That never happened, even though margins for the first quarter increased about 6% due to significant price increases. According to Wattles, margins needed to reach 15% for Reel to turn a profit.

Reel pressure

Industry sources said that while Hollywood had been pleased that its e-tailing division had cut its monthly losses from $5 million to $3 million, the brick-and-mortar parent was beginning to face mounting pressure about Reel’s finances. Reportedly, studios were beginning to ask for cross-corporate guarantees that would have required Hollywood to pay Reel’s bills when the e-tailer could not.

Dave Rochlin, chief operating officer for Reel, said Friday he could not comment on “rumors” surrounding the company’s change in direction.

The marriage between Hollywood and Reel seemed a logical one at its outset in 1998, with brick-and-mortar Hollywood able to quickly establish itself as an Internet-minded concern with the merger. Meanwhile, Reel was able to take advantage of its corporate parent’s distribution deals with studios.

So far, not too good

The idea was to appeal to Wall Street analysts who have long seen traditional video retailers as a dinosaur in the looming world of electronic delivery. Blockbuster has been starting online ventures and partnering with satellite and video-on-demand companies in an effort to prove to Wall Street that it is positioned for the electronic future. So far, those efforts have not proven particularly fruitful for either Blockbuster or Hollywood.

In the months that followed the purchase of Reel by Hollywood, Reel’s losses continued to mount and Hollywood took a beating for the drain Reel was placing on the parent company: from a 52-week high of $26.37, the company’s stock price plunged to a low of $6.06. On Friday, Hollywood stock was trading at $7.34 per share.

Hollywood closed its books for 1999 some $51.3 million in the red on revenues of $1.1 billion, mostly due to Reel. While Hollywood’s operation earned $31.3 million, Reel lost $82.6 million.

The blood continued to spill into this year, with Reel posting a first quarter pre-tax loss of $18.1 million on revenue of $14.3 million before a $12.5 million amortization charge. In all, the e-commerce operation lost $23.6 million for the period ended March 31. As a result, Hollywood as a whole lost $12.1 million on $335.3 million in revenue.

On April 19, Hollywood retained investment bank Donaldson, Lufkin & Jenrette to guide the company as it searched out “strategic opportunities” to boost stockholder value.

In May, Hollywood unveiled a revamped Reel.com site that emphasized content such as news and movie reviews. The e-commerce side, such as information about new DVDs for sale that typically appeared on the home page, was pushed deeper into the site, but was still accessible from the home page’s “shop” tab.

The struggles of e-commerce sites to stay afloat have been endemic to the sector, but Reel.com is arguably the entertainment e-tailer with the highest profile to actually disconnect from its customer base.

The March announcement by CDNow’s corporate auditor Arthur Andersen that the site didn’t have enough cash to last the year has been the best-publicized of the e-tail travails, but that company has continued operations, maintaining that a major investor in its business will be announced by June 30.

(Wendy Wilson and Enrique Rivero are staff reporters for Video Business.)

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