The long-simmering battle between studios and video-rental retailers — particularly Blockbuster — is escalating into all-out war. And the result may revolutionize the way studios price their videos and DVDs.
The first warning shot was fired last month: Blockbuster chairman-CEO John Antioco told analysts that he may end many of the vid rental giant’s revenue-sharing agreements with the studios.
Warner Home Video announced that the studio is pricing the videocassette of “Swordfish” at $22.98 — in other words, for sale in supermarkets instead of rental at Blockbuster.
Was the announcement a coincidence?
For more than a year, Warner HV president Warren Lieberfarb has said that, if the studios are shut out from sharing in the profits from DVD rentals, he would consider two retaliatory measures.
One is to shorten or even collapse the pay-per-view/video-on-demand window, letting viewers order pics by remote control at the same time they hit vidstore shelves. The other is to price everything at sell-through simultaneously on VHS and DVD — thereby cutting off any rental window advantage that video-rental chains like Blockbuster have over stores that only sell videos.
Lieberfarb won’t discuss Blockbuster or Antioco; he’ll only say that Warner likes to push the envelope as regards pricing. He views “Swordfish” as a “highly ownable title,” even though its box office was only $68 million. (Warner raised some eyebrows last year when it priced “The Perfect Storm” for sale instead of rental — and that film made $182 million.)
Out of rentals?
Many majors are girding for battle. And sources say that Warner believes studios may be able to get out of the video-rental business altogether by pricing everything for purchase and letting the chips fall where they may.
Indeed, the rental of non-hit titles is in decline, and retailers are ordering fewer copies of each title at traditional prices; Warner believes it will be easier to make up the difference with sale-priced titles.
Another economic upside is the tremendous savings to studios in consolidating their ad dollars into a single sales-only business model for both the videotape and DVD formats.
Warner believes that the combination of those two factors may provide an economic incentive to abandon rental pricing in all forms.
Still, there are risks for the studios. Lower-priced product would likely mean that more units of a tape or DVD would be sold, but at less revenue per unit.
Until recently, it was believed that the net income from that increased volume would probably not be enough to match the fees earned from revenue-sharing or from selling at the higher sticker price. But the average number of units purchased by retailers at traditional rental prices has been declining, meaning that the bar to make up that income has been lowered.
In the mid-’90s, vid rentals flattened out and stores were threatened by electronic delivery services. So Antioco came up with a new plan.
He began ordering more copies of new titles, so customers were guaranteed the title would be in stock; Blockbuster would pay only about $10 per tape to the studios, which would get to share in the rental fees.
DVD changes everything
That worked fine until the 1997 intro of DVDs, priced at $15-$30; Blockbuster could pay low upfront costs for each DVD (around $15 wholesale), and not have to split the rental fees. Since DVDs now account for up to 30% of Blockbuster’s rentals, the playing field has clearly changed.
In the typical current deals, studios get a minimum guarantee of $30-$35 per VHS cassette on new releases. Vid-rental stores also agree — under current rev-share contracts — to stock many of the studio’s non-hit theatrical titles and video premieres.
As the DVD market has evolved, Blockbuster is becoming less happy with the rev-share deals it negotiated before DVD became so strong. With low-priced DVDs becoming such a large part of Blockbuster’s business, the retailer wants to lower its minimum guarantee on each videocassette and end the requirement that it must buy non-hit titles.
But those two components are the only reasons studios agreed to rev-sharing in the first place. Moreover, they want Blockbuster and other retailers to start cutting them in on DVD rentals.
Hollywood Video struck a deal with MGM earlier this month to rev-share on DVD, but it is the only major retailer to do so. The much larger Blockbuster is showing no signs of following suit.
Some studios and independent video suppliers took the Blockbuster announcement in stride.
“Fine,” said one video studio topper. “I’ll be glad to just go back to selling them everything without revenue-sharing.”
Rev-share loss no biggie
For independents, who don’t have the clout to get guaranteed rev-share minimums from Blockbuster and wind up netting less on rev-share than they do with traditional pricing, the idea of abandoning rev-sharing isn’t daunting.
One indie president said the supplier has to wait 12-15 weeks to get paid through rev-share, all the while hoping and praying that the title rents well. On traditional pricing, the indie gets paid after 60 days and there are fewer logistical issues.
The stunt-filled thriller “Swordfish,” starring John Travolta and Halle Berry, seems well enough suited to the core DVD consumer, but does Warner really believe people are hungry to buy this title on videocassette?
Perhaps. Consumers showed surprising interest in Warner’s vid version of Travolta’s last box office disappointment, “Battlefield Earth.”
But even if the pricing of “Swordfish” wasn’t a direct response to Antioco, you know Warner is hoping he takes it that way.