‘THE WALL STREET JOURNAL. Movies: Blockbuster Seeks a New Deal With Hollywood Wall Street Journal; New York; Mar 25, 1998; By Eben Shapiro; Editio Easter edition Start Page: BI ISSN: 00999660 Subject Terms: Revenue sharing Video stores ‘Motion picture industry Companies: Blockbuster Videos Inc Abstract: Everyone knows video stores don't stock enough copies of hot new releases. It should be an easy problem to fix, but it isn't. Now, the nation's largest video chain, Viacom Inc.'s Blockbuster, and the .)) Hollywood studios that supply it are overhauling the way they do business to correct a flaw that has already taken a serious toll. Ending years of squabbling, Blockbuster and the studios are moving toward a new distribution method known as "revenue sharing." It has the potential to trigger a vast shift in the economics of Hollywood and the video business. Under revenue sharing, stores get videotapes from studios through a middleman for a mere $8 each, and then return a portion of the rental revenue back to the studios. The stores' lower initial should allow them to stock far more copies of hot tities and, in theory, satisfy a vast unmet demand. The studios, in turn, are betting they'll make up on volume what they give up on video prices. Depending on the deal, stores can opt to sell used tapes themselves or return them to studios. Full Text: Copyright Dow Jones & Company Inc Mar 25, 1998 Tonight thousands of movie fans will head to their local video store to pick up a copy of "Air Force One." But chances are, quite a few of them will have to settle for "Shanghai Surprise.” Everyone knows video stores don't stock enough copies of hot new releases. It should be an easy problem to fix, but it isn't. Now, the nation's largest video chain, Viacom Inc.'s Blockbuster, and the Hollywood studios that supply it are overhauling the way they do business to correct a flaw that has already taken a serious toll, Ending years of squabbling, Blockbuster and the studios are moving toward a new distribution method known as "revenue sharing.” It has the potential to trigger a vast shift in the economics of Hollywood and the video business. Here is how the old system worked: Studios sold videotapes, through a distributor, to Blockbuster and many other retailers for $65 cach. The stores would rent the tapes as many times as they could and keep all the proceeds. But at $65 a pop, it cost a lot to keep up with the burst of demand for each new video release. Under revenue sharing, stores get videotapes from studios through a middleman for a mere $8 each, and then return 2 portion of the rental revenue back to the studios. The stores! lower initial investment should allow them to stock far more copies of hot titles and, in theory, satisfy a vast unmet demand. The studios, in tum, are betting they'll make up on volume what they give up on video prices. Depending on the deal, stores can opt to sell used tapes themselves or return them to studios. A lot is at stake for Hollywood movie studios, where video rentals and sales, 2 $20 billion business, have OPERATNS 476 - 11become the single greatest source of revenue. Last year, rentals slipped 3%, while sales to consumers plunged 8%, according to Alexander & Associates Inc., a New York research firm. ‘Some consumers are being wooed away from video by direct-to-home satellite services, which offer vast selections of movies. But many more people are just fed up with video stores! thin inventory of hot releases, people in the industry concede. “There used to be a notion in this business that a little dissatisfaction is OK," says Michael Johnson, president of Walt Disney Co.'s huge Buene Vista home video operations. Disney began using the revenue- sharing model with Blockbuster earlier this year to address the problem of customers disappointed by thin inventories, Mr. Johnson says. "It is like going into McDenald!s, asking for your burger and getting french fries," he says. Other studios could follow soon. Time Wamer Inc.'s Warner Bros. is weighing a shift to revenue sharing, ‘The company's internal research reveals a sharp drop in the percentage of VCR owners who regularly rent movies. Fully 20% of customers surveyed said they were unable to rent the movie they wanted on a typical trip to the video store. Indeed, the Warner Bros. research suggests that the longer people have a VCR, the less interested they are in renting old titles and the more they want current hits. "I's become a fashion business," says Warren Lieberfarb, president of Warner's home video unit. “Unless significant modifications are made," Mr. Lieberfarb warns, "growth will be hard to come by, and further declines might be on the horizon." Wamer is offering video stores other incentives to stock more tapes. The studio will ship 20% more copies free fo stores that agree to order rather hefty minimum quantities. Propelling the video-industry's behind-the-scenes makeover is Viecom's chairman, Sumner Redstone. He's intent on proving his acquisition of Blockbuster Entertainment Corp. wasn't an epic mistake. Last spring, with Blockbuster's profits under strain and management in turmoil, Mr. Redstone made the rounds of Hollywood studios, asking for price concessions on tapes. Otherwise, he argued, Blockbuster’s problems would inevitably work their way back up the industry food chain. Studio executives initially scoffed at Mr. Redstone, but the past year's weak results have evidently opened their minds. What Blockbuster does has loud repercussions in the video industry. The chain commands almost 30% of the video retail market, Its next-largest competitor, Hollywood Entertainment Corp., has a market share of about 5%, according to an industry trade group. The other retail players are smaller chains and independent stores, ‘One party that stands to benefit from the distribution shift is Rentrak Corp. a Portland, Ore,, video distributor that has been operating a revenue-sharing program for the past 10 years. Blockbuster recently signed a multiyear pact with the company, whose proprietary information system records each and every rental at its clients’ stores and acts as the go-between for them with the studios. In exchange, Rentrak gets 10% of rental revenues, with the stores and studios getting 45% each. Ron Berger, Rentrak's chairman and chief executive, says the studios’ old videopricing system puts an “artificial cap" on the rental business. "We could grow the business at 20% to 30% if we remove the constraints on the number of tapes in the marketplace," he says. OPERATNS 476 - 12It's far from clear whether merely stocking more videotapes can beat back the growing interest consumers are showing in direct-satellite services. More than six million houscholds now subscribe to direct satellite services, skimming off formerly avid video renters, "We have not been to the video store since we got the system," says David Hynes, owner of a small insurance company in Bloomington, Minn, who signed up for General Motors Corp.'s DirectTV service last year. Itall adds up to a lot more advertising for videos from both studios and retailers. Metro-Goldwyn-Mayer Ine. is increasing ad spending for new video-rental releases by more than 20% to $20 million. Most bigger studios also are weighing sharp spending increases. Sony Corp's Columbia TriStar home video unit is developing 2 pilot version of a Sunday supplement, similar to a newspaper's weekly television guide, to highlight upcoming releases. Meanwhile, Blockbuster is advertising heavily, too, with its new slogan, "Go Home Happy.” Bruce Orwall contributed to this article, Credit: Staff Reporter of The Wall Street Journal Reproduced with permission ofthe copyright owner. Further reproduction or distribution is prohibited without permission, OPERATNS 476 - 13