Biography
The Economics of the Video Business, Part 1: Used Videos
By Ellen Thompson
Oct 28, 2006, 09:20

We opened Hometown Video and Ice Cream with about 1000 videos – a small inventory compared to your average Blockbuster, but enough to respectably fill our shelves.

Predictably, our movie inventory consisted of a mix of new and old titles. The overwhelming majority of our rental fees were generated by new releases but the majority of shelves were lined with old titles in the form of used videos.

Starting a business with an inventory of used videos was a matter of both cost control and convenience. At the time, there was an entire industry of used video brokering businesses. The owner-operators of these businesses would drive from store to store buying and selling videos. We bought our initial inventory of used videos from one such broker for about $9 a video. It was easy - he just showed up with a mixed lot of videos and we wrote a check. This seemed a lot simpler than trying to figure out what to buy, let alone shopping title by title.

Video brokers continued to be critical vendor partners. We’d use them to buy videos that were essential parts of our video catalog but needed to be replaced because they had been lost or were beyond repair.

Even more importantly, we sold video to them. Video brokers would buy tapes we purchased as new releases at $25 a copy four weeks after we initially bought them. This provided cash flow that could be used to stock more copies of new releases.

The movies they bought back from us were sold to other video stores that did not stock brand new releases. Instead, these stores bought their videos for about half price four to five weeks after their release. At the time, it seemed like video store suicide, but the reality is that new videos are expensive and it was a viable business model in some markets. (new videos are expensive links to Part II)

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