Virtual Video Chain Builds Its Presence on PCs
When Stuart Skorman sold his six New England video stores to Blockbuster in January 1994, getting back into video retailing was the furthest thing from his mind.
So far, in fact, that he spent the next 18 months traveling the country as a high-stakes professional poker player.
“I needed a break,” said Skorman, who in his last year of operating Empire Video Superstores of Keene, N.H., grossed $6.7 million in revenue. “On a good day, I could be up $20,000. . . . I needed the risk.”
These days, Skorman has found what some would call a happy medium. He’s traded in his poker chips for another stab at video retailing, but he’s doing most of his business in the risky world of the Internet--where potential, rather than profits, gets the attention.
After a year of running Reel.com, a World Wide Web-based video store offering 85,000 titles for sale and 35,000 for rent, Skorman has yet to make any money. But he’s had absolutely no problems attracting investors, with $15 million in venture capital coming from the likes of Paul Allen, Bill Gates’ partner in Microsoft Corp., and Scott Beck, the former vice chairman of Blockbuster Entertainment.
Just last month, Reel.com--which is based in the Bay Area suburb of Emeryville--announced it will be acquired by publicly traded Hollywood Entertainment Corp., a chain of more than 1,000 video stores based in Wilsonville, Ore., in a deal valued at $100 million.
Skorman won’t discuss revenue other than to say, “We’re doing 100 times as much business as we were a year ago.” He concedes, however, that he doesn’t expect Reel.com to operate in the black any time soon.
“Right now, nobody is looking to make a profit, and the market doesn’t expect any of us to make a profit,” Skorman said. “The Internet is so big that all of the people like us who are building brand names on the Web need to be reinvesting every penny we can get ahold of to build for the future.”
Indeed, Internet sellers of related products, like books and music, are also losing money, despite escalating revenue. Amazon.com, the Internet bookstore, reported sales of $116 million for the second quarter that ended June 30, an increase of 316% from the comparable quarter last year. In the same period, Amazon posted an operating loss of $11.6 million.
Similarly, CD Now, perhaps the biggest of the online music vendors, reported a 292% revenue jump in the second quarter ended June 30 but the company suffered a net loss of $8.9 million.
Curt Alexander of Media Group Research doubts that Internet music retailers like CD Now “will ever become profitable.” He is even more skeptical of selling videos over the Internet.
“It’s fine and useful for catalog, but what percent of the video sell-through business is catalog?” Alexander said. “It’s all new stuff, and I just don’t think people are going to buy the hits over the Internet. For one thing, they’re not going to be price-competitive with the Wal-Marts of the world, and for another, video purchases tend to be impulse buys.
“You want them when you want them--that night. With the Internet, if you order it tonight, your order goes out the following day, if you’re lucky, and you get it three or four days later in the mail--unless you pay a premium price, which makes it too expensive.
“I just don’t think it’s much of a business.”
Others, however, do. Reel.com may be the largest of the online video stores, but several other virtual retailers have set up shop on the Internet to sell movies. Critic’s Choice, a division of Playboy Enterprises, offers a vast selection of catalog titles. Total E, a division of mail-order giant Columbia House, sells some video but focuses on music. Netflix.com, based in Scotts Valley, Calif., rents and sells DVDs.
And Big Star.com, based in New York, is a video, DVD and laserdisc sales site formed by ex-Columbia House video chief David Levitsky and former Viacom Inc. corporate development executive David Friedensohn.
Skorman concedes that most of Reel.com’s business, as much as 80%, comes from older, catalog video titles. In May, Reel.com’s top-selling movies included such chestnuts as 1986’s “Blue Velvet,” 1962’s “The Manchurian Candidate” and half a dozen old Godzilla movies.
But in an attempt to attract more customers, Reel.com is also content with razor-thin profit margins on the hits. New releases typically sell for 15% below the suggested retail price, with some discounted 20% or more off list.
Reel.com is also taking advance orders for “Titanic,” expected to be the top-selling video of all time, at just $9.99--a full 50% off the suggested retail price.
“Of course we’re losing money,” Skorman said. “But in the Web business, your customers are worth so much, and it’s a price we can afford to pay. This is not a crazy gamble; this is very calculated and according to a plan. And knowing we have the money to carry out this plan, we could end up being the biggest seller of ‘Titanic’ in the world.”
Reel.com is also hoping to build a loyal customer base by offering video rentals. Videos rent for $4.50 per week, plus shipping. For consumers who rent five movies at a time, the rate drops to $3.50.
“It’s pretty expensive, and it’s a very small percentage of our overall revenue,” Skorman said. “But we like being the only full-service video store on the Web.”
Reel.com is an outgrowth of a movie matchmaking Web site Skorman launched in January 1997. Before selling his Empire Video Superstores chain to Blockbuster, he helped the giant retail chain develop its in-store kiosks, where customers could type in their favorite movies or stars and receive a list of other movies they might like.
“We didn’t know it at the time, but we were designing a Web site,” Skorman said. “So after I got done playing around, I spent six months doing research and development work, learning all about the Internet and hanging around with these young computer brains.”
In January 1997 Reel.com went online as an electronic movie matchmaker. At first, Skorman said, he hoped to make money by selling ads on his site, “but we never got to that point.”
“It became obvious, real fast, that the future was to become a store,” Skorman said. “We think the virtual store of the future is going to succeed based not on price or variety, but on enhancing the customer experience by giving them great product information.”
Accordingly, Reel.com continues to provide gobs of movie information to customers and non-customers alike.
Each of the 85,000 videos in Reel.com’s online catalog comes with a synopsis; a list of recommended similar movies; ratings of sex, violence and cinematography; a summary of reviews; and links to star and director filmographies.
All of this has studio executives such as Paul Culberg, executive vice president of Columbia TriStar Home Video, enthusiastic about the future of online video retailing.
“It’s a complete electronic video store,” Culberg said. “It’s creative and it’s interesting, and I think people are buying product.”
