The final reel for Reel.com

Hollywood Entertainment shuts the door on Reel's e-commerce business, deciding it just doesn't pay

In what looks like yet another example of an online retailers' promise exceeding profits, video-store chain Hollywood Entertainment announced Monday that its Reel.com will cease its e-commerce operations and lay off virtually all the company's employees.

Hollywood Entertainment officials said that while the site was building an audience, it just didn't pay.

"Closing Reel.com's e-commerce business was a difficult decision. However, with Hollywood's stock dropping 75 percent during the same period that the operating profits of Hollywood Video stores were up over 40 percent, we could no longer justify funding the e-commerce business," CEO Mark Wattles said in a release.

Hollywood plans to keep Reel operating as a movie site, providing entertainment news and content. Current movie orders will be fulfilled, and future e-commerce business will be directed to Buy.com, the company said.

Hollywood will take a charge of $25m (£16.5m) to dispose of Reel's e-commerce business. Any ongoing expenses associated with maintaining Reel.com will come from Hollywood's existing marketing budget. Also, the 'Reel on Demand' and other video-on-demand efforts at Reel will be absorbed into Hollywood Entertainment.

Reel's woes were not too surprising, said Jupiter Communications analyst Ken Cassar. "We know that Reel has been buried by Amazon.com in terms of video sales and is number two or three, and that's a tough place to be. Most of these markets are nearly winner-take-all in the mass-market category," he said.

While Reel's revenue has increased (the Net division pulled in $13.8m in the most recent quarter) it has racked up more than $121m in losses since the last year.

"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" Hollywood CFO David Martin said in a release.

"Investors will now be able to focus on the profits of our core video rental business."

Hollywood was one of the first brick-and-mortar firms to partner up with a dotcom, snapping up Reel for $100m in July 1998. But while many companies have since followed its lead, things have not always worked out.

Last month, Walt Disney shut down Toysmart.com, deciding it just couldn't compete against the bigger players in the industry. Another toy store, RedRocket.com, which Viacom owns, also closed its doors in May.

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