Curtain Falls on Reel.com

Hollywood Entertainment Corp. announced Monday that it is shutting down the e-commerce aspects of Reel.com, the film-related Web site that was often ranked among the ten most visited Internet sites.

While Reel.com’s sales operation, including DVDs and videos, will cease, the site will remain active as a content destination. In addition to retail sales, the site offers movie news, including reviews, interviews, clips and recommendations.

Hollywood Entertainment CEO Mark Wattles had told investors there would be an initial public offering of Reel.com. However, those plans were abandoned when the IPO market declined. Wattles had also indicated plans to convert Reel.com into a video-on-demand Web site, enabling users to download movies as soon as the technology was perfected. Those plans are apparently on hold or cancelled.

With 1,700 Hollywood Video stores in 43 states, Hollywood Entertainment is the second largest video retailer in the United States.

Unexpected Failure

Hollywood Entertainment, which acquired Reel.com two years ago, has reportedly been spending up to $5 million (US$) per month to operate the site, contributing to Hollywood Entertainment’s Q1 loss of $12.2 million, compared with $2.8 million for the same period one year earlier.

In business since 1996, Reel.com’s demise comes as a surprise to a number of observers who believed the site had a viable future in online consumer retailing.

Just last month, Wattles assured investors that Reel.com would be spun off into a private company, to the tune of about $45 million. Wattles had intended to convert Reel.com into a self-funding operation that would operate independently from Hollywood Entertainment.

Once losses began to mount, reports swirled that studios were demanding assurance from the parent company that it would pay Reel.com’s bills if the site could not support itself.

By the end of last year, Hollywood Entertainment, with revenues of $1.1 billion, lost $51.3 million. Following those dismal figures, Reel.com posted a first quarter loss of $23.6 million.

By Friday Hollywood Entertainment’s stock registered at $7.34 per share, compared to a 52-week high of $26.37.

Reel Loss

As recently as a month ago, Reel.com was engaged in legal battles with other Web sites that were using the word “Reel” in their domain names. The movie retailer mounted an aggressive campaign to protect its trademarks, “Reel,” and “Reel.com,” among others.

Some observers saw the effort as a clear statement of industry dominance from Reel.com, despite mounting losses and skepticism from a parent company that wondered if its online acquisition would ever break even, much less show a profit.

Blockbuster Ready

Meanwhile, news of Reel.com’s fall will most likely be music to the ears of chief competitor Blockbuster, a company that has revamped its Web site and landed a prime spot in the America Online entertainment channel.

This summer, Blockbuster expects to have all of its 7,153 locations wired to its Web site, allowing customers to reserve movies online for pickup at neighborhood Blockbuster retail stores.