Reel.com lays off entire staff

Reel.com is laying off more than 200 employees and turning over its e-commerce operations to Buy.com, the companies announced today.

Terms of the deal between the Hollywood Entertainment-backed Reel.com, which sold videos and DVDs and provided information about movies, and Buy.com were not disclosed.

When Hollywood Entertainment bought Reel.com, the acquisition was an example of brick-and-mortar retailers, such as Barnes & Noble and Egghead, looking to expand their businesses online. The news today punctuates the abrupt reversal of fortune for struggling e-tailers and content sites that had come to rely on investors' nearly limitless patience for losses in the name of building brand and customers.

Under the terms of the deal, Hollywood Entertainment will maintain the content on the Reel.com site, which will continue to exist, and will continue to use the database of movies for its video stores. Sales will be directed to Buy.com--once a competitor. The video e-tailer will also license its content to Buy.com, the companies said.

Hollywood Entertainment, the owner of the Hollywood Video chain of video stores, acquired Reel.com in July 1998 in a deal valued at $100 million. Hollywood Entertainment will take a $25 million charge.

Reel.com, which made its first sale three years ago, has about 1.1 million customers.

The last few weeks have seen heavy cutbacks for once high-flying Internet sites. Boo.com and APBnews.com shut down, while Salon.com and CBS.com announced cutbacks.

"Unfortunately, the business model of rapid customer acquisition required large losses and significant cash funding," Mark Wattles, CEO of Hollywood Entertainment, said in a statement today.

"As a result of the major declines in the value of publicly traded e-commerce companies, we have been unable to obtain outside financing for Reel and do not believe it is in the best interests of Hollywood's banks, bondholders and shareholders to continue funding Reel from Hollywood's strong video store cash flow," Wattles added.

Hollywood Entertainment's shares have dropped 75 percent during the past year and are trading around $7 today, despite the fact that the operating income from its video stores has risen by more than 40 percent, Wattles said.

In February 1999, Wattles publicly explored the possibility of an initial public offering for Hollywood Entertainment's Internet properties. The company filed for an IPO in December.