Sampa Video

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9-201-094

REV: OCTOBER 7, 2003

GREGOR ANDRADE

Sampa Video, Inc.

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Sampa Video, Inc. was the second largest chain of videocassette rental stores in the greater Boston
area,operating 30 wholly owned outlets. Begun in 1988 as a small store in Harvard Square catering
mostly to students, the company grew rapidly, primarily due to its reputation for customer service
and anextensive selection of foreign and independent movies. These differentiating factors allowed
Sampa Video to compete directly with the leader in the industry, Blockbuster Video. But unlike the
largerrival, Sampa had no ambitions to grow outside of its Boston territory. Exhibit 1 contains
summary financial information on the company as of their latest fiscal year-end.

In March 2001, Sampa Videowas considering entering the business of home delivery of movie
rentals. The company would set up a web page where customers could choose movies based on
available in-store inventory and pick a timefor delivery. This would put Sampa in competition with
new internet-based competitors, such as Netflix.com that rented DVDs through the mail and
Kramer.com and Cityretrieve.com that hand deliveredDVDs and videocassettes.

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While it was expected that the project would cannibalize the existing operations to some extent,
management believed that incremental sales would be substantial inthe long run. The project would
provide customers the same convenience as internet-based DVD rentals for the wider selection of
movies available on videocassettes. Sampa also planned to hand deliverDVDs. The company
expected that the project would increase its annual revenue growth rate from 5% to 10% a year over
the following 5 years. After that, as the home delivery business matured, thefree cash flow would
grow at the same 5% long-term rate as the videocassette rental industry as a whole. Exhibit 2
contains management’s projections for the expected incremental revenues and cash...