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The Chopping Block

How Blockbuster Video sends you home happy and beats the competition.

by Jim Hanas

t the beginning of the year, Blockbuster Video made a promise to its customers: “Go Home Happy.” The gist of the campaign is that the chain now carries so many copies of hot titles that there’s one there just waiting for you.

“The number one complaint was when a customer came to a Blockbuster store, they couldn’t get the movie they wanted,” says a Blockbuster spokesperson Liz Greene.

A new commitment to “copy-depth” has changed all that, and in the second quarter, which ended last month, Viacom, Blockbuster’s corporate parent, reported a 16 percent increase in rentals and a 7 percent increase in active memberships. This time last year, Blockbuster was bleeding losses and calling in turnaround wizard John Antioco to take over as president and CEO.

So, how did they do it?

The answer lies in revenue sharing, a scheme for distribution that has been around the industry for years but was not embraced by the nation’s largest video-rental chain until recently.

There are two ways retailers can put videos on their shelves. They can buy them outright for around $70 and keep whatever money they get from rentals. Under revenue sharing, on the other hand, retailers pay a nominal fee per copy on the front end, typically under $10, and then pay a percentage of the rental take-back to the studio. The initial cost is less, there’s less risk if a title doesn’t rent well, and it allows retailers to put more copies of new titles on the shelves.

The strategy seems to have stopped the bleeding, and it has taken the heat off from Hollywood Video, Blockbuster’s nearest competitor and a chain that was founded on revenue sharing. It has about a third the number of nationwide locations as Blockbuster, but its strategy has long been to open stores near its competitor and use revenue sharing to offer guarantees very much like Blockbuster’s new “Go Home Happy” promise. Blockbuster couldn’t beat ’em, so they joined ’em.

The larger chain might be a whole lot better at it than its competitors, however, owing to its purchasing clout and corporate connections. Even before it adopted revenue sharing, Blockbuster was the only retailer with enough influence to buy videos directly from the studios, because of its size and its inside track to Hollywood via its corporate cousin Paramount Pictures, which is also owned by Viacom. Other retailers have to go through distributors to buy videos or to set up revenue sharing agreements. Hollywood Video, for example, has long used Portland-based Rentrak – a pioneer in revenue sharing – as a middleman to the studios.

Blockbuster’s ability to slip the middleman and set up agreements directly with studios clearly poses a threat to its competitors. Hollywood Video, for example, is now being sued for $160 million by Rentrak, which alleges the chain has been looking to deal directly with studios, a la Blockbuster, despite an exclusivity deal that requires them to go through Rentrak.

And some independent videostore owners are up in arms, claiming that Blockbuster’s hotline to the studios represents unfair competition, since the chain is able to negotiate better deals than other retailers. According to John Cusack, a Chicago-based attorney representing the Independent Video Retailers Group, Blockbuster typically pays back 40 percent of its revenues to studios, compared to the 50 percent typically paid back by other retailers.

“Blockbuster wants a competitive leg up to hurt its competition,” says Cusack. “I think it violates anti-trust law.”

Whether that’s the case may soon be up to the courts. IVRP president Bob Webb has been very vocal recently about his intention to bring such a suit.

Locally, videostore owner Ray Fiore – who owns Midtown Video, Video Movies & More, and Movie & A Pizza and has used revenue sharing for some titles for the last decade – doubts that Blockbuster’s new arrangement is the panacea it seems to be. For one thing, increased revenues do not necessarily translate into increased profits, since a percentage of that revenue really belongs to the studio. And if a title gets really hot, retailers can end up paying more for it than if they bought it outright. In the case of sleeper rental hits like Clerks and Swingers, for example, Fiore says he ended up paying over twice the movies’ list price in shared revenues.

Fiore says his business has not been noticeably affected by Blockbuster’s new strategy, but adds that “it’s going to hurt, not only the independent, but the consumer” as it leads the industry to emphasize blockbuster hits over foreign and art films, among other niche genres.

“Your core video people that rent every night, they want something different,” Fiore says. “[That] could be the very reason that our business is up.”


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