Paying for Hollywood's Fame

What do Movie Gallery (Nasdaq: MOVI  ) and Peg Entwistle have in common? Who is Entwistle? I'll get to that in a moment. Movie Gallery announced Friday that it was going to take on $325 million in new debt later this month. The move is necessary as the country's third-largest video rental chain gets ready to acquire the second-largest player, Hollywood Entertainment (Nasdaq: HLYW  ) .

Movie Gallery, until now best known for hitting the rural markets that its two largest rivals have mostly avoided, emerged victorious in a bidding war with Blockbuster (NYSE: BBI  ) . Yet taking on new debt in acquiring a peer can be a dangerous pastime when it comes to the waning popularity of home video storefronts.

With Blockbuster promoting an online service that others like Netflix (Nasdaq: NFLX  ) and Wal-Mart (NYSE: WMT  ) have been offering for years -- and the cable companies threatening both camps by investing in video on demand -- is Movie Gallery diving too deep for Hollywood?

That brings us full circle to Entwistle. She was a London-born actress who came to America in the early 1900s with dreams of stardom. While she had some initial success on Broadway, she moved to California to try her hand at films. In 1932, after things didn't go as planned, she scribbled a suicide note, climbed up the Hollywoodland sign -- yes, it read "Hollywoodland" back then -- and dove to her death.

This doesn't mean that Movie Gallery is going to pay the same price for Hollywood that Entwistle did. However, it's certainly a risky move for the company. Hollywood has a refreshingly innovative history. It scored well a few years ago by launching video game stores inside its video rental locations, and it was way ahead of its time in running the Reel.com retail site. But for some time now, it's been a struggling company, reaching out for a suitor with a firm grip.

Movie Gallery's success has come from acquiring smaller players in a fragmented sector that specialized in small markets. In Hollywood, it is buying the exact opposite. Yes, it can ultimately pan out, but even Entwistle went to Hollywood with big dreams.

Some literary leaps worth taking:

• It was a bizarre love triangle for the rights to Hollywood's affection.
• While it seems as though Hollywood was copying Netflix with its new five-star rating system, the company it chose to implement the recommendations was a technology provider for the original Reel.com and has been at it since 1994.
• Talk shop with your fellow Fools in our Netflix discussion board.

Longtime Fool contributor Rick Munarriz has been a Netflix subscriber -- and investor -- since 2002. The Fool has a disclosure policy. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.