Reel.com to close shop

Over the past year and a half, Hollywood Entertainment had poured about 55 million into Reel.com, but had failed to stop the flow of red ink, which it said had become a drain on the rest of the company.

quot;For the past 18 months, large losses related to infrastructure investments in Reel.com have completely overshadowed the strong profits and cash flow from our nearly 1,800 Hollywood Video superstores,quot; Chief Financial Officer David Martin said in a statement.

quot;Closing Reel.com8217;s E-commerce business was a difficult decision. However, with Hollywood8217;s stock dropping 75 percent during the same period 8230; we could no longer justify funding the E-commerce business.quot; The company said it will incur an after-tax loss of about 25 million related to the disposal of Reel.com.

One E-tailer that was not disheartened by this latest closure was the online superstore Buy.com, which worked out a deal to take over order fulfilment for Reel.com in a deal that could give it exposure to several hundred thousand new customers.

Under the deal negotiated between the two companies, shoppers who visit the Reel.com site will be directed to Buy.com. Buy.com will pay Hollywood Entertainment a fee for every customer who goes on to complete a purchase on its site.

quot;We think it8217;s a good way to acquire customers at a significantly lower cost than we8217;ve been paying,quot; said Buy.com President Greg Hawkins. He declined to disclose exact terms of the customer referral arrangement, but did say Buy.com would be paying around half of its normal customer acquisition costs for the Reel.com customers, and that it was currently paying quot;about 30 or soquot; to acquire customers.

In fact, it was high customer-acquisition costs that may have played the biggest role in sinking Reel.com. The company had enjoyed rapid growth with revenues last year reaching 40 million, from 7 million the year before. quot;But because we were in such rapid customer-acquisition mode, we had to sell our videos very cheap,quot; explained chief financial officer David Martin, who said the company had operated last year at a negative 13 percent gross margin.

Although it had managed to nudge margins back into positive territory this year, they were never sufficient to cover hefty spending on advertising and infrastructure. quot;A year ago that was all fine,quot; added Martin. quot;The markets just told us to grow, grow, grow. We did everything we were expected to do.quot;

Although Hollywood Entertainment said it was through with online retail, it left the door open to relaunching its site as an online video rental outlet, once video-on-demand is available online. Rather than closing the site entirely, it will continue to post entertainment and movie content on the site, which it hopes will drive customers to its offline rental outlets.

quot;And some day, when video-on-demand is possible, you8217;re going to need online video stores. We8217;re keeping the door open for online video rentals,quot; said Martin.