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New technology threatens U.S. video rental industry

The Associated Press

PORTLAND-- The nation's No. 2 video chain expanded with the boom in videocassettes that began in the 1980s, a boom based on analog magnetic tape that Hollywood Entertainment knows is already fading under the onslaught of digital technology.

The VCR boom pushed Wilsonville-based Hollywood past the $1 billion mark in sales in 1999, a huge jump from 1993 revenue of $17 million. The company's rapid expansion -- 350 new Hollywood Video stores in both 1997 and 1998 -- contributed to sales increases of 53 percent in 1998 and 47 percent in the first nine months of 1999.

Yet many investors have decided the video industry could disappear faster than it bloomed.

Sales of digital video discs -- DVDs -- are taking off, and ultrafast Internet lines being hooked up all over the country could deliver movies right to the home with the click of a computer mouse.

Video on demand -- the ability to custom order a movie from the home -- is either imminent or on the horizon, depending on who is talking. My sources say it is five to seven years away, said Jennifer Jordan, a stock analyst with Black & Co. in Portland.

Last year, Hollywood Entertainment's stock lost half its value. The newly issued stock of industry leader Blockbuster Inc. also lost ground.

It doesn't seem to bother Jeff Yapp, president and chief operating officer of Hollywood Entertainment.

Yapp, 41, noted that one of the best days in the history of the company's Portland-area stores came two years ago during an ice storm. No one made it to work, Yapp said with a laugh. But they made it to the video store.

Yapp, hired by company founder Mark Wattles in 1997, sees opportunity where others see a threat.

The former president of Twentieth Century Fox Home Entertainment says Hollywood Entertainment has a proven record in an industry where, in a single generation, video rentals now produce 56 percent of movie studio revenues, more than double theater sales.

The big rental chains have become the cash cow for the movie studios, said Jeffrey Hoskins, an analyst with Seidler & Co. There really is no incentive to change that model right now.

Hollywood Entertainment officials call technology the cloud that never rains, noting that prophets of doom keep predicting the end of the video rental industry while it grown into a $34 billion industry worldwide, $18 billion in the United States.

Hollywood Entertainment has consistently shown the ability to put a new twist on renting a movie, another reason the company thinks it can adapt and survive the coming changes.

It takes credit for originating the five-day video rental, two-tiered pricing for new vs. old titles, and guaranteed availability of certain titles.

Clearly, they've been the most innovative company in the business on a consistent basis, said Ben Feingold, president of Columbia Tri-Star Home Video.

In October 1998, Hollywood bought Internet video sales company Reel.com for $96.9 million. Hollywood intends for Reel.com to be its Internet platform when the day comes that video on demand is a reality, Yapp said.

Still, Yapp admits the industry is looking for ways to win back investors.

He says that Hollywood will turn cash flow positive in 2000. That means it will be able to finance its growth internally rather than borrow money.

Unlike Blockbuster, Hollywood continues its rapid expansion, opening on average a Hollywood Video store every day, Yapp said.