NEW YORK — Viacom Inc.’s Blockbuster video rental chain is negotiating to increase its supply of new-release video tapes from the major studios, in exchange for giving the studios a share of the revenue derived from renting the extra tapes, sources say.
Blockbuster, which is struggling to stabilize its troubled business, is looking to stem the loss of customers who leave its stores empty-handed because all the available copies of a new tape have already been rented. Industry sources said about 15% of its customers leave without renting a video.
The video rental chain is close to a deal with at least some studios, sources say, and extra supplies of tapes could start showing up in Blockbuster stores in the near future.
Viacom deputy chairman Tom Dooley told Wall Street analysts on a conference call Wednesday, for the company’s third-quarter earnings, that Blockbuster was working on an “arrangement with the studios” to improve its “depth of inventory.”
Dooley declined to comment on details of the deals when contacted by Daily Variety, saying they were “confidential agreements with the studios.” He added that the proposals “will be beneficial to both Blockbuster and the studios.”
“We are trying to put more units in front of consumers,” Dooley said.
Wall Streeters say that under the proposed arrangements, Blockbuster would pay the existing price for tapes supplied under the current formula. But some studios have agreed to supply extra tapes to Blockbuster at the cost of duplication, markedly lower than the usual price, in exchange for a share of the revenues.
The studios would get a cut of the revenues only after the tapes had been rented a certain number of times, sources said. Industry execs stressed that there was “no one deal” but instead different arrangements were being negotiated with different studios.
Blockbuster’s attempts to persuade the studios to give it a break on the prices it pays for tapes went nowhere, sources say. This way, both the studios and Blockbuster may benefit, said Merrill Lynch analyst Jessica Reif Cohen.
The negotiations with the studios are one element in a recovery plan being overseen by Viacom’s senior execs and Blockbuster’s new CEO, John Antioco. Dooley said Wednesday that overhead reductions at Blockbuster’s headquarters and January’s opening of the chain’s new distribution center should reduce the company’s expenses, which would help to improve earnings.
But long-term earnings growth needs an upturn in sales, which have been declining through much of this year. While the sales decline appears to be leveling off, and same-store sales are flat so far in the fourth quarter, Dooley cautioned against estimating what the full quarter would look like.
Blockbuster won’t open any new stores from Thanksgiving until June of next year, Dooley said, waiting to get its new distribution center up and running before it starts the job of shipping product to new stores. The center will open in January but it will be another six months before existing distribution branches are all closed.
After that Blockbuster will resume its new store opening program at the same rate as this year. Dooley said Viacom would likely spend $250 million opening 500-1,000 new stores next year both domestically and internationally.
That is 50% down from the number of new stores opened a couple of years ago. This year, however, Blockbuster will open just over 1,000 stores. Some analysts have called for Viacom to stop opening new stores as a way of preserving Blockbuster’s cash flow, but Dooley said the new stores “are doing very well.”