Entrepreneur Trades Bird Feathers for Videos

VedomostiZalishchansky says there is one golden rule in his line of business: Renting a video must cost one-fifth as much as buying one.
From chemistry to taxis to magazines to ostrich feathers, Mikhail Zalishchansky worked in a lot of different professions before making it big in videos.

The entrepreneur opened his first video rental outlet 2 1/2 years ago, and Videoboom is now the largest rental chain in the country with 70 outlets and annual turnover of about $4 million.

Zalishchansky says it was an ideal time to start the business, whereas today it would be impossible to create a video rental chain from nothing.

"In 1999 in Moscow, you could break even on the $25,000 invested into a new store in the space of four to five months. Today it would take four to five years at least," he says.

The market quickly became saturated in the summer of 2000 after the fire in the Ostankino television tower, he says. Video rentals picked up quickly as the city's televisions went blank, and other entrepreneurs caught on to the boom.

"This was a great tragedy for our industry," Zalishchansky says. "Those 10 days brought in huge profits, but drew a lot of attention."

Overnight, hundreds of new chains opened up, and by May 2001 the market was deluged.

"Had there been no fire, the market would have only reached saturation point this summer," Zalishchansky says. "Now there are about 1,000 stores in Moscow, and the city only needs 500 to 600. Many will not survive the summer."

Video rental chains emerged in Russia about 15 years later than in the West. Blockbuster was founded in the 1980s, and the company became the biggest video rental company after gobbling up chains throughout the world.

Blockbuster now has 8,000 outlets worldwide and reported turnover of $4.3 billion last year. Media giant Viacom bought Blockbuster in 1992. The second-largest chain in the United States, Hollywood Entertainment, has only 1,800 outlets and annual sales of $1.4 billion.

While the rental business was emerging in the West, Zalishchansky was studying chemistry at Moscow State University, where he also ran the student disco.

Upon graduating, he went into business, buying a few Elektronika BM12 camcorders and opening a video store in one of the university's auditoriums. Zalishchansky made 5,000 rubles, while the average student's stipend was 40 to 60 rubles, before the university's Communist Party committee closed down his business.

Zalishchansky returned to scientific studies before taking another crack at capitalism. He published the men's magazine Andrei, but left after a disagreement with his partner. He then decided to move to Australia to work as a researcher while studying English.

Unable to find a job as a chemist, Zalishchansky worked for nine months as a taxi driver before being hired by the Australian Academy of Science.

"It was extremely boring, despite fitting my specialization perfectly," he says. "I began to look for another way to apply my skills." Zalishchansky turned to the video business.

While Australians may feel far removed from the rest of the world, Russian emigres in Melbourne and Sidney have it far worse. Zalishchansky says that Russian films could only be bought in one emigre store where a couple of dozen cassettes were on sale alongside fish, sausage and preserves.

Zalishchansky saw his opportunity and opened a specialized video rental store offering 800 cassettes. He received a startup loan of 6,000 Australian dollars (about $3,000 at the time) at 24 percent interest annually.

Before setting up shop, he worked with one of the biggest Australian video rental stores to get a feel for the business.

Zalishchansky paid off the loan within five months, but then business took a turn for the worse. Competitors sprung up and the prices fell. Soon customers had seen all the films on offer, while in Russia there were virtually no new ones being produced.

In 1997, Zalishchansky returned to his homeland, leaving the business to his partner. For a while he tried to sell Australian ostrich feathers to local theaters, but the venture failed.

While still in Australia, Zalishchansky realized that the perfect video stores had already been set up in Russia, but were being used for another purpose: as libraries.

"All the features were the same, the different genres, the shelves, the layout, absolutely identical," he says.

Zalishchansky found $12,000 in investment, added his own 5,000 Australian dollars and opened a video outlet in May 1997 in a library in western Moscow.

But for 1 1/2 years, the project brought no profit.

"Neither the market nor the customer was ready [for this kind of service]," Zalishchansky says.

Films were rented out illegally because there were virtually no cassettes on the Russian market that were licensed for rental. As the anti-piracy effort increased, distributors tried to close down Zalishchansky's business.

Then the Videoservice company asked him to set up a store. Using the company's funds, Zalishchansky opened the country's first Western-style rental store. Today there are 32 Videoservice outlets in Moscow.

But Zalishchansky decided to break off on his own and create his own chain. He opened up the first Videoboom outlet near Chistiye Prudy in May 1999, offering a share of the business in exchange for investment. Videoboom now has 70 outlets, 25 of which operate under franchise agreements.

But just a year after the business got off the ground, troubles began. First the Ostankino fire stoked competition, while a heat wave last summer bit into to the company's turnover as Muscovites opted for the great outdoors over movies. Outlets soon began closing.

Meanwhile, video rental services have grown more expensive as rents and the price of cassettes go up. In 1999, a cassette cost 150 rubles, then 220 rubles in 2000 and now 350 rubles.

But the price of renting the cassettes can't be raised, he says. There is one rule to running a video rental store: Renting a movie must cost one-fifth as much as buying it. And Muscovites are not prepared to pay more than 40 rubles for a cassette, he adds.

Furthermore, it used to cost $25,000 to open an outlet in Moscow, Zalishchansky says, whereas the going rate now is $40,000. Many rental stores will not survive the competition, he adds.

"This business seems simple: You get a cassette, you rent it out. But to make it rentable and profitable, you must take into account scores of different details. You have to create the collection carefully from the 9,000 cassettes in the catalogue."

To boost business during the summer, Videoboom extends its rental period to three days so that customers could take the cassettes to their dachas. The interior of the stores is also important, Zalishchansky says.

"It has to be cozy, the customer should feel like digging around and having a look for a film, rather than grabbing a movie and leaving quickly," he says.

As with the other big chains, Videoboom is trying to expand its business into the provinces.

Having opened outlets in Samara, Taganrog and Cheboksar, Zalishchansky has halted the expansion. Turnover at these outlets does not exceed 100,000 rubles a month, he says, while for a store to be successful it must bring in 150,000 rubles to 160,000 rubles per month.

Zalishchansky is thinking of moving on and has hired a manager to deal with the day-to-day business at Videoboom.

He is thinking of opening up a coffee shop, but in the meantime is offering expertise in a rather specialized area -- consulting services to Russians hoping to emigrate to Australia.