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Warner Home Vid cuts distribs out of retail biz

With the homevid industry in a state of transition, Warner Home Video is taking some radical steps that will accelerate that evolution.

The firm informed its network of wholesale distributors of rental-priced videocassettes that it is cutting off their business entirely and will begin dealing directly with retailers.

It was also disclosed this week that Warner, along with Columbia TriStar Home Video, has taken the unprecedented step of making a financial investment in home delivery service Kozmo.com.

Moves come just three weeks after it was learned that Warner Home Video president Warren Lieberfarb will likely add the studio’s pay-per-view business to his portfolio.

Execs at other studios see the moves as an indication that Warner Home Video is trying to position itself to maximize its control of all manner of distribution of its filmed content regardless of what method of electronic or physical distribution will be adopted in the coming months and years.

Major shift

“We’ll look back on this moment as the time there was a major shift in the industry,” said one competing supplier who declined to be identified.

Warner’s $10 million investment in online retailer Kozmo.com, which studio execs described as merely “an investment in an interesting business plan,” was revealed in Kozmo.com Inc.’s filing with the SEC this week for a stock offering that the company hopes will raise $150 million.

Amazon.com paid $60 million this week for a 31.8% stake in Kozmo.com, which provides one-hour delivery of rented video, food, books and other items. Gotham-based company recently initiated service in Los Angeles and Pasadena.

It isn’t clear how much Columbia TriStar invested in Kozmo.com.

While competing studios and retailers will be carefully watching Warner’s foray into retailing to see how that evolves, the entire industry has been shaken by the news that Warner is cutting off the distribs that have been the mainstay of video retailing for more than 25 years.

Warner has spent the last few years shifting toward bypassing wholesalers in favor of dealing directly with the few large video retail chains that make up about 50% — or about $130 million- $150 million of Warner’s rental biz, according to industry estimates — of the video rental business, including Blockbuster and Hollywood Video. But observers believed that most independent stores were too small to be serviced directly by a major studio.

Economic innovations

But innovations in recent years to increase the number of copies available for major titles in every store by selling more videos on a much lower per-unit revenue-sharing basis have cut into the traditional high markup business of distributors.

Two big wholesalers — Sight & Sound Distributing and M.S. Distributing — went out of business earlier this month, leaving Warner Home Video with mil-lions of dollars in unpaid bills.

Warner Home Video exec VP and general manager Jim Cardwell said that “the flattening out of consumer demand, the complexities of revenue-sharing programs and the reduction in the number of distributors through attrition made us make the change today.”

Rather than increase its own infrastructure, Warner will pay the biggest of the distribs — Ingram Entertainment — a fee to handle all sales, customer service, credit and collection.

Serving retailers

In addition to saving costs associated with supporting distributors, Warner Home Video said that retailers will be better served by dedicated Warner sales reps and that some may even see some cost reductions since there is no middle man.

But for many of the remaining distribs like Major Video, Baker & Taylor, Wax Works, VPD and ETD, the loss of Warner titles, which represent about 20% of the video rental market, could hasten their doom. Ingram, however, stands to gain by creating a new business with Warner that will help reduce the number of its competitors.

In anticipation of a potential backlash from distributors, industry sources noted that Warner waited until most of its major titles were introduced this winter and spring to announce the dramatic change in its distribution strategy; it will hold off on releasing most other big titles like “Any Given Sunday” until the new pro-gram takes effect in September. There are two other major releases that will debut this summer, “The Green Mile” in June and “The Whole Nine Yards” in July.

Execs at other studios were mostly taking a wait-and-see attitude.

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