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TK's MORNING BUZZ: No Word Yet From John Antioco on His Revenue-Sharing About-Face, But We Did Get the Word From Retailers James Rice and Tom Hannah -- and Theory-Buster Bruce Apar

27 Jul, 2001 By: Thomas K. Arnold

I have yet to hear from John Antioco -- or anyone from Blockbuster, for that matter -- on his abrupt about-face on revenue-sharing.

But an interesting e-mail dialog has sprung up between readers of this column and my fellow columnist, "Working Weekend" author (and Video Store Magazine editorial director) Bruce Apar, that I thought I'd share with you today.

James E. Rice of Reel Entertainment Video in Erie, Penn., wrote in with a theory of his own: "Revenue-sharing, as you said, it a marketing tool," Jim wrote. "However, as seen in my store, anyway, along with other independent video retailers with whom I've spoken, revenue-sharing does not bring more money to your bottom line. Dollar for dollar spent, you are better off buying traditionally.

"So now that VHS growth is slowing and Blockbuster has the market share it wants, I believe Mr. Antioco is going to focus on making the chain more profitable and bringing much more money to the bottom line and to the chain's shareholders.

"Do I think they are going to do away with revenue-sharing? No. However, the current output terms they have with most studios do not make sense, nor does bringing in product in the quantities they did -- and probably, as a chain, paying more per title that they would have had they bought it traditionally. Furthermore, as you stated, Mr. Antioco has turned the chain around. But revenues and operating margins have not showed the same growth. Market share doesn't pay the bills or, in this case, the shareholders."

Jim's e-mail arrived at 7:42 a.m. Exactly 40 minutes later, our old friend, Tom Hannah of Video Quest in Joliet, Ill., chimed in with his two cents' worth.

"I think it is quite possible that Blockbuster underestimated how devastating mass quantities of the big hits would be to 'B' titles. With tons of copies of the movies customers really want to watch, there is little incentive to rent those small box office titles or direct-to-video releases.

"When Blockbuster first got into revenue-sharing it was something the chain wanted, and it had to make certain concessions. Now, I think there are three things Blockbuster is looking for [as these deals come up for renewal]:

1. No guarantees. They can't really make guarantees when no one knows how much DVD rentals will cut into VHS rentals.

2. No output. They can't afford to be using valuable shelf space for movies that do not rent... they need that space for DVD. If you think the market for 'B' titles is bad now, you ain't seen nothing yet.

3. Lower goals. Finally we have something in common.

"As for using this to force the studios into revenue-sharing on DVD, his tactics might have the opposite effect. The studios should realize that it is NOT in their best interests to let one customer dictate terms to them."

An hour later, the thoughtful Mr. Apar e-mailed me a note in which he begged to differ with parts of what each retailer had to say. He disputed Mr. Rice's contention that market share does not pay the bills, maintaining that "more market share means more leverage with vendors means driving down the cost of goods means more profitability to pay the bills and keep the stockholders satisfied."

Bruce also took issue with Mr. Hannah's closing comments about it not being in the studios' best interest to let one customer dictate terms to them.

"Here's the paradox: Any vendor does not want to let any single customer get into a position of dictating terms and conditions, but any vendor has to consider the market share of every customer," Apar wrote. "For a vendor who covets premium real estate and customers, the fact that Blockbuster is a single customer is incidental to the fact that it also writes more than one-third of that vendor's sales.

"Tom's right in theory with his business axiom, but in practice it never works that way: virtually any retailer with 20% or more market sharedictates terms to vendors (viz. Toys "R" Us, Home Depot, Wal-Mart, et al).When dealing with such category killers, as the power retailers are known,what exactly is in a vendor's 'best interests' becomes very subjective andrelative for each vendor. The only parties in whose 'best interests' it is clearly not are those retailers' smaller competitors, who rationalizetheir disadvantaged position by saying it is not in the best interests of the vendors."

Who's next?

Comments? Contact TK directly at:TKArnold@aol.com

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