Rentrak Corporation

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Rentrak Corporation

7700 Northeast Ambassador Place
Portland, Oregon 97220
U.S.A.
Telephone: (503) 284-7581
Toll Free: (800) 929-8000
Fax: (503) 282-9017
Web site: http://www.rentrak.com

Public Company
Incorporated: 1981 as National Video, Inc.
Employees: 275
Sales: $123.78 million (1999)
Stock Exchanges: NASDAQ
Ticker Symbol: RENT
NAIC: 51211 Motion Picture and Video Production; 541512 Computer Systems Design Services; 53311 Lessors of Nonfinancial Intangible Assets (Except Copyrighted Works); 5699 Miscellaneous Accessories

Rentrak Corporation is the world’s largest distributor of prerecorded videocassettes on a pay-per-transaction basis. In a pay-per-transaction arrangement, video rental store operators lease movie titles rather than purchasing them and share the rental proceeds with the supplier. Rentrak, which processes more than 11 million transactions per week, services retailers throughout the United States and Canada, as well as a number of outlets in Japan and the United Kingdom through affiliated companies. The company also is involved in Internet-related business through three subsidiaries: Blow Out Video, Inc. sells videos and DVD movies over the Internet and at five retail locations; FourMovies.com provides an online database of more than 160,000 movie titles stocked by approximately 10,000 video rental stores; and 3PF.COM, formerly operating as ComAlliance, Inc., processes and fulfills orders for electronic-commerce companies.

Origins

For its formation and development, Rentrak took its direction from Ron Berger. Born in Tel Aviv and raised in New York City, Berger was a 25-year-old college dropout living in Portland, Oregon, when he scored his first success in the franchising business. In 1973, he began franchising a chain of camera shops and quickly amassed a fortune. The chain, named Photo Factory, grew to 54 stores during its first six years in business. By the end of the decade, Berger’s net worth had soared to $15 million, but he would lose everything before the 1980s began. Photo Factory was heavily in debt and in a vulnerable financial state. When interest rates rose sharply in mid-1979, Berger’s company collapsed, forcing him to declare bankruptcy. Overnight, his fortune was gone.

After liquidating Photo Factory, Berger was still unemployed six months later when he received a telephone call from a friend. Berger’s friend offered him a job managing a video rental store in New York City, which he refused, but the offer set Berger’s professional life in motion again. He was intrigued by the video store concept, then not far out of its infancy as a retail format. Berger went to the public library in Portland and began looking through stacks of telephone books, searching state by state for all the video rental stores in operation. He identified 900 such stores throughout the country and, with the help of several former Photo Factory employees, began calling each one, endeavoring to create what would become the first national survey of video rental stores. After compiling market research data gleaned from 300 stores on his list, Berger was ready to distribute the information. He paid for a one-inch advertisement in the Wall Street Journal and offered his survey for $95 per copy. The response was swift and enlightening. Deluged with requests for his survey, Berger realized he had found a business that was destined to grow. After selling 300 copies and pocketing more than $25,000, he decided to start a chain of franchised video rental stores called National Video.

Unable to obtain any financing because of the financial failure of Photo Factory, Berger was forced to seek alternative means to get his business started. In January 1981, he left Portland and rented an inexpensive hotel room in Las Vegas, which was hosting the Consumer Electronics Show. Berger paid for another advertisement in the Wall Street Journal, a simple message that read: “If you agree the future of video retailing is in franchising, call me.” Berger submitted the telephone number of his hotel room and waited. The third call he received was from a Waco, Texas, television executive named Jack Hauser, who listened to Berger explain his National Video franchise concept. Berger offered to sell Hauser a franchise for the nominal price of $10, but he insisted the store had to be designed and managed precisely according to his specifications. Hauser agreed. The first National Video unit, established in Waco, was immediately successful, earning $3,500 in profit during its first month in business. Hauser was elated and Berger had proven his point. With a highly successful prototype to point to, Berger began franchising the concept in earnest, asking for far more than the $10 he had charged Hauser.

Development of Rentrak in the Mid-1980s

Berger’s second attempt at franchising proved more successful than his first, enabling the rejuvenated entrepreneur to charge as much as $35,000 for an individual National Video franchise. By 1985, there were nearly 600 National Video franchises in operation, generating nearly $8 million in annual sales for Berger’s Portland-based company. At this point in its brief history, National Video ranked as the largest franchised chain of rental video stores in North America, having quickly carved a dominant position in a burgeoning industry, but despite the rising financial figures Berger and his franchisers faced a worrisome problem. As more and more people frequented video rental stores, the inventory of each store needed to increase and change more frequently, a burdensome financial task for the mom-and-pop operators who not only composed most of National Video’s franchiser ranks but also represented the overwhelming majority of video rental store operators throughout the country. With each movie title costing approximately $70, most National Video operators lacked the capital to consistently refresh their 2,500-title collections and, consequently, were struggling to remain competitive. Realizing the gravity of the problem facing many in the video rental industry, Berger came up with a solution that would enable his franchisers to better compete.

The details of Berger’s plan formed the core of what became known as the pay-per-transaction (PPT) system. Instead of purchasing movie titles from movie studios, retailers leased the titles. Berger’s leasing system, dubbed Rentrak, divided the rental profits among video rental store retailers, Berger’s company, and the movie studios, with the retailers and the movie studios receiving 45 percent each and National Video, the corporation, receiving the remaining 10 percent. The payments were determined by the number of times a particular title was rented. In exchange for sharing their profits, retailers paid less than $10 for a title, enabling them to buy a larger quantity of popular movies and to increase the breadth of their collections as well.

For those National Video operators with a meager amount of capital, Rentrak represented a viable solution to their problem, but before the effectiveness of the leasing system could be tested, Berger needed some capital of his own. To fully develop Rentrak, including the software needed to keep track of each rental transaction in a more than 600-unit chain, Berger needed money. Bankers continued to shun the Portland-based company because of the failure of Photo Factory, a situation that forced Berger to sell a portion of his company to the public. In November 1986, he completed National Video’s initial public offering, selling 30 percent of the company to investors, which raised $5 million. With the proceeds, Berger was able to develop and market his PPT system, at the time unaware of the great importance that Rentrak’s debut would represent in the history of his company.

Rentrak proved highly successful, quickly becoming an indispensable tool for National Video franchisers. As franchisers signed up for the system, they were joined by retailers outside the National Video network, creating what became a highly important source of revenue for Berger’s company. By the end of the decade, roughly 1,000 video rental stores were connected to Rentrak, each paying $5,000 for the hardware and software needed to manage the revenue-sharing leasing system.

The late 1980s witnessed the encouraging acceptance of Rentrak, but the end of the decade also saw Berger’s chain of National Video outlets disappear from the national retail landscape. A new breed of competitor was to blame, specifically the rental video stores rolled out by Wayne Huizenga, who began feverishly expanding his chain of Blockbuster Video stores during the late 1980s. Huizenga’s stores, which stocked 10,000 titles, dwarfed the 2,500 title units composing National Video, and true to their name, the Blockbuster units delivered a devastating blow to National Video operators. “Wherever Blockbuster opened a store,” Berger remarked in a December 5, 1994 interview with Forbes magazine, “they killed us.” By 1988, Huizenga had approximately 250 stores in operation, with considerably more soon to open up throughout the country. Berger envisioned a bleak future for National Video, forcing him to make what he later referred to as the most difficult decision in his business career. In 1988, he sold the 746 National Video franchises in operation to Philadelphia-based West Coast Video. In the wake of the divestiture, Berger’s business became solely dependent on PPT-derived revenue, which was evinced in the company’s new corporate title, Rentrak Corporation.

Company Perspectives:

Rentrak celebrated the ten-year anniversary of its Pay-Per-Transaction system in January 1999. Rentrak pioneered the concept of sharing revenue between program suppliers and home video retailers as a way to lower the initial investment retailers make for each videocassette, thereby increasing the number ofvideocassettes retailers can obtain and expanding the total studio rental revenues generated for a movie title. The company offers videocassettes from the majority of the major studios and independent video suppliers.

Although the sale of the National Video franchises represented the loss of a profitable, $100 million business, Berger’s strategic decision was in the best interest of his company’s long-term future. Blockbuster expanded vigorously—acquiring West Coast Video as it blanketed the nation with stores—and quickly dominated the rental market. Berger, meanwhile, was free to focus his full attention on expanding his leasing system, which remained an attractive alternative to paying upwards of $70 per title. Although unprofitable during its first several years as an exclusively PPT company, Rentrak saw its ranks of subscribers swell nevertheless. By the time the company was able to turn a profit, there were more than 3,000 retail outlets using Rentrak, enabling Berger’s company to register $69 million in revenue in March 1994, the end of its fiscal year, and its first profit for several years, a gain of $813,000. By this point, Berger, who had been hamstrung by the rise of Huizenga’s Blockbuster during the late 1980s, had already broken free from his self-imposed confinement. His talents had always realized their greatest success in retailing, which was where Berger directed Rentrak’s corporate resources in 1993.

Diversification and Growth during the 1990s

The success of Rentrak had convinced Berger that the system could be altered to create a just-in-time inventory computer system for other types of retail businesses. Accordingly, in 1993 he acquired The Pro Image, a 200-store sports memorabilia franchise. With stores in 45 states, as well as units in Canada, Puerto Rico, Germany, and Japan, Pro Image generated $84 million in revenue in 1992. As the Pro Image acquisition was being concluded, Berger was preparing to re-enter the retail video market, five years after his exit. In November 1993, Rentrak opened a 20,000 title store in Times Square called Blow Out Video that sold videos rather than renting them.

Thanks to the continued growth of its PPT leasing system and the addition of a retail chain and the Blow Out Video concept, Rentrak was able to recoup the revenue lost when Berger was forced to sell the company’s National Video franchises. Annual sales had dropped to $11 million immediately following the divestiture, but by 1995 the company was collecting more than $110 million in sales, as the number of stores using the Rentrak leasing system surpassed 5,000. Pro Image was expanding as well, as the 229 store chain announced its intentions to establish units in Malaysia, Singapore, and Brunei. Berger also found time to develop a new business for his rapidly growing enterprise. In May 1995, Berger acquired Entertainment One Inc., followed by the purchase of Supercenter Entertainment Corporation in September 1995. Each of the acquired companies operated video sales and rental operations at supercenters owned by the massive discounter, Wal-Mart. In October 1995, Berger combined his own Supermarket Video entity with his two recent acquisitions to form BlowOut Entertainment. Six months after its formation, BlowOut Entertainment was operating 181 video rental departments in selected Wal-Mart and Kmart supercenters.

Rentrak entered the late 1990s as a multi-faceted enterprise growing in three directions, but the company would soon lose its diversified complexion. In 1996, Berger restructured Rentrak by disposing of the subsidiary businesses that interfered with the company’s mainstay PPT revenue sharing system. Citing a need to focus all the company’s resources on developing and marketing PPT services, Berger liquidated the money losing Pro Image subsidiary by either selling or closing the more than 200 stores composing the chain. BlowOut Entertainment, unprofitable as well, was spun off to Rentrak shareholders in the form of a special dividend. Meanwhile, the company’s PPT business continued to blossom. In 1995, Rentrak signed an agreement with Movie Gallery, a video rental retailer, to install PPT systems in all of Movie Gallery’s nearly 900 stores. The deal was expected to be worth between $100 million and $150 million in new business over the course of the ensuing ten years.

Following the 1996 divestitures, Berger focused on expanding the company’s PPT business, including a concerted push into the United Kingdom in 1998 and an increase in the company’s involvement in Japanese markets. By the end of the decade, the company was continuing to sign up new stores to its leasing system, despite the competitive pressure mounted by movie studios, which began offering revenue sharing leasing programs of their own. During Rentrak’s fiscal year ending in March 2000, nearly 2,000 new video outlets were connected to the company’s PPT network.

As Rentrak prepared for the 21st century, its consistent progress in PPT services was complemented by promising prospects in a new area of expertise: Internet-related business. Through a subsidiary named FourMovies.com, the company provided web site services for video retailers and consumers through a searchable online database. The database included more than 160,000 movie titles stocked by approximately 10,000 video rental stores. Rentrak’s other major electronic-commerce business, 3PF.COM, processed and fulfilled customer orders for Internet businesses. Although these new areas of opportunities had the potential for significant revenue growth, it was Rentrak’s dominant position in PPT services that fueled Berger’s confidence for the future.

Key Dates:

1980:: Bankrupt entrepreneur Ron Berger begins compiling the first national survey of video rental stores.
1981:: Berger sells first franchise of his National Video retail concept.
1986:: National Video’s initial public offering funds the development of Rentrak, a pay-per-transaction system.
1988:: Facing competition from rival Blockbuster Video, Berger sells his 746-unit National Video chain and renames company Rentrak Corporation.
1993:: The Pro Image, a 200-store sports memorabilia franchise, is acquired.
1995:: The acquisition of Entertainment One and Supercenter Entertainment leads to the formation of BlowOut Entertainment.
1996:: The Pro Image and BlowOut Entertainment are divested.
1999:: Two new subsidiaries, ForMovies.com and 3PF.COM, Inc., are formed to support the company’s pay-per-transaction business.

Principal Subsidiaries

Attitude 2 Travel, Inc.; BlowOut Video Holding Company; FourMovies.com, Inc.; LRC Inc.; Mortco Inc.; Orient Link Enterprises; PDF, Inc.; Rentrak Canada; Rentrak Europe BV (Netherlands); Rentrak UK Limited (England, 92%); RTK Kelly Limited; Streamlined Solutions, Inc.; Transition Sports, Inc.; 3PF.COM, Inc.