LOS ANGELES (AP) _ Five years ago, video store owner David Zullo was ready to hit the eject button and bail out of the business because of chain retailers and other competition for viewers' attention.

But a funny thing happened on the way to the liquidation sale. Video rentals went up at his store, despite a sea of blue-and-yellow Blockbuster signs dotting the horizon.

With some aggressive marketing, a bit of diversification on movie titles and renewed investment in time and money, 1998 was the best year Zullo has had in the 15 years he's operated his Showcase Video stores around Shelburne, Vt.

While many retailers opened video stores because they were movie lovers, industry analysts say it's savvy business people who will survive as Blockbuster, Hollywood Entertainment and other retail monoliths spread.

``Unless you are extremely clever and resourceful and really understand retailing, it's going to be hard to be part of this industry's future,'' said Bruce Apar, editor-in-chief of Video Business, a trade publication. ``The industry's matured to the point where it's not very forgiving anymore of people who opened stores because they like movies.''

As many as 2,500 U.S. video stores went out of business in 1998, according to the Video Software Dealers Association, roughly 10 percent of the total rental stores. With the growth of national chains, which added about 1,000 stores last year, that trend is likely to continue and even accelerate, some industry analysts say.

``I doubt I'll be in business five years from now,'' said Ray Hoving, who owns a video store in Victorville, Calif.

The shakeout resembles what happened to independent book and record stores that were run out of business by national retailers. Handfuls of locally owned shops survived and even thrived as smaller niche stores, and industry experts see the same happening for video retailers.

``Our store looks more like a coffee shop than it does a Blockbuster,'' said Mark Vrieling, who owns three Rain City Video stores around Seattle and is chairman of the video dealers association. ``We bring in a different crowd. We've still got the new release junkies, but we're catering to the real film buffs.''

Based on customers' rental patterns, one of Vrieling's stores is heavy on foreign films while another has a bigger family-oriented section. The idea is to play to the interests of the neighborhood, something a generic chain store cannot do, he said.

Smaller retailers count on anti-corporate customers, film buffs such as Jackie Sanchez of Montclair, N.J., who prefers the personal touch of a homegrown video store. She rents movies from her neighborhood store, Video Showcase.

``I feel strongly I have to be loyal to my local video store,'' she said. ``You go in and they know your name, and if they didn't have what you wanted, they'd try and get it for you.''

Though some small video dealers concede they will have a tough time staying in business, many say they're steeling themselves to tough it out against corporate retailers and other competition such as satellite television.

``I've had to work a lot harder in the last year and a half than I have in a long time,'' said John Virtue, who owns five Movietime Video stores in central Indiana. ``It's almost been like reinventing the business.''

Like many small retailers, Virtue said he is playing to independent advantages, stocking more eclectic titles, improving customer service and trying to keep a veteran staff with broader movie knowledge than the typical chain-store employee.

Retailers like Virtue and Zullo said they also try to keep pace as best they can with the chain-store edge of providing scores and scores of the biggest new releases. Through complicated deals with studios, small video shops are able to buy a certain number of copies and lease many more, allowing them to have 50 or 60 copies of hits like ``Armageddon'' on hand where they once might have had only a dozen or so.

In the last year or two, Blockbuster and other chains irritated independent retailers by cutting revenue-sharing deals with studios that allowed them to get huge numbers of top movies for far less money upfront. That led to guarantees by chain stores that some hot titles would always be in stock, resulting in diminished traffic at smaller stores with only a few copies of the same movies.

But it raised the profile of the industry as a whole and spurred a healthy 9 percent increase in video-rental revenues in 1998 after a decrease the year before. Americans spent a record $8.1 billion last year on movie rentals, according to the video dealers association.

Big video stores took in most of the increase, with Blockbuster now accounting for nearly 30 percent of the rental business. Blockbuster, which has about 6,300 stores, would not comment on its strategy because it is in a quiet period imposed by the Securities and Exchange Commission while its parent, Viacom Inc., prepares a public stock offering for the video chain.

Though national chains and independent retailers each accounted for roughly half of the business, rentals at small stores overall have been relatively flat.

As more small retailers close, the market share for independent stores will shrink, analysts say. Apar said independents might account for as little as 20 percent of the rental business within five years.

``I think there's room for very well run mom-and-pop stores to thrive,'' said Jeff Jordan, president of online video seller Reel.com, which is owned by Hollywood Entertainment. ``But it's hard to compete against the resources and business models that Hollywood and Blockbuster provide.''

As technology improves, viewers also will have ``video-on-demand'' options, movies piped right into their homes over the Internet, Jordan said.

With competition from all sides, the choice for many small retailers comes down to closing their video stores or branching off into other businesses.

Kent Beckloff, owner of Castle Rental Center stores in northwest Arkansas, said video rentals accounted for most of his business four years ago. Now, videos account for only 8 to 10 percent of profits, he said.

He increased his focus on rent-to-own furniture and electronics as video rentals waned, Beckloff said.

``I'm trying to decide now if I should stay in the video business at all,'' Beckloff said. ``It's a lot of work for not a lot of profit.''