Here is an analyst report the retail video rental industry which I found on Yahoo thought you might find informative. I notice that peoples initial reaction to a Video store play is, "Video stores are going away", but the contrary is true, their revenues are higher than ever. Hang on guys J.C. VHS is going to go places.
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An Introduction to the Industry
The home video retail industry has experienced significant growth over the last several years. According to industry reports, gross rental revenues for the home video industry in the United States have grown from approximately $2.6 billion for rentals in 1985 to approximately $7.5 billion in 1997 and are estimated to reach $9.7 billion by the year 2002. After including the consumer spending on video purchases, the current total figure comes close to $18 billion. Industry reports also show that 87% of American households owning televisions also own a VCR and that nearly one quarter of all Americans make a trip each week to their video store. Over 18 million VCR's are purchased each year. Convenience, limited out-of-pocket expense and reliability are all factors that make video rentals the preferred medium of entertainment for millions of customers.
Not only has this industry experienced rapid growth and trends of consolidation, the business models of the larger competitors, namely Blockbuster Video, Hollywood Video, and Video Update, have fundamentally changed for the better. This change in business practice is due to direct revenue sharing deals that have been arranged with the motion picture studios. In the past, video store chains would generally purchase 7 to 10 copies of a popular new release from a middleman for around $85 each. They would then rent these films out for a period of time until they made their money back. By dealing with the studios directly and sharing a percentage of revenue, video stores are able to obtain anywhere from 75 to 150 copies of new movies up front at a very fractional cost. These deals have allowed the largest competitors to greatly satisfy customer demand and in turn have driven up sales, revenue, and earnings. Since the industry's largest competitors can negotiate directly with studios, the middleman's business will no longer survive on the same scale. Their earnings are now being directed toward Blockbuster, Hollywood, and Video Update.
The smaller chains appear unlikely to benefit much from this more effective method of obtaining tapes. They are not large enough to negotiate directly and simply cannot compete with the big guys. Analysts have now established that as many as 3,500 independent video stores went out of business during calendar 1998. In addition, supermarkets, which control an estimated 15% of the domestic video rental business, are beginning to leave the segment this year because copy-depth programs are foreign to grocery store business models. With the possible exception of rural areas, where a local rental shop serves a small population of customers, the smaller video chains will be driven into bankruptcy and big guys such as Blockbuster, Hollywood, and Video Update will enjoy significant economies of scale.
A portrayal of the impact of revenue sharing on Hollywood Video's business is as follows: as the percentage of rental titles acquired under revenue sharing agreements rose from 33% in the second quarter to 50% in the third quarter and 80% in the fourth quarter, respective same-store sales growth accelerated from 1% to 7% to an incredible 19%. Hollywood's quarterly results have surprised and exceeded even the highest analyst estimates over the past three quarters and their success has been realized in their stock price as it has moved up from a low of $8.75 to a high of $34.69.
Video Update's stock on the other hand currently changes hands for about $1. If one looks at Hollywood's market value of about $1 billion and then at the $25 million put out on Video Update, it might be reasonable to say that Video Update deserves a closer look. Are the 657 company owned superstores under the Video Update masthead worth only 1/40 of Hollywood's 1,260 corporate owned superstores? If Wall Street has truly overlooked Video Update's seemingly cheap valuation, then maybe it's time to acknowledge the company's potential. |
