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TK's MORNING BUZZ: The Real Winners Under Revenue-Sharing Are the Studios

16 Nov, 2000 By: Thomas K. Arnold


Beleaguered Hollywood Entertainment Corp.'s latest financial filing with the Securities and Exchange Commission (SEC) holds some pretty interesting conclusions.

The chain blames its sorry financial state, in large part, on revenue-sharing. No real surprise there--I've always held that the cost of goods under even the most optimum revenue-sharing deals, 40%, is higher than the cost of goods retailers are accustomed to paying under the traditional buying model (which typically saw retailers spend no more than 30% of rental revenues on videos).

What is surprising is that Hollywood blames revenue-sharing for sucking many top titles out of the sellthrough pipeline. Read between the lines and its becomes clear that sellthrough pricing is still the preferred copy-depth incentive, and that while in the revenue-sharing era retailers can bring in more copies of hot new releases on the cheap, they not only get stung on the back end, but they also lose a lot of product that previously would have gone direct to sellthrough, with significantly lower margins.

Turn the cards and one sees that the real winners under revenue-sharing are the studios--which explains their continued commitment to the revenue-sharing model. They flood the market with more cassettes, and then make more money on the back end because more cassettes invariably means more turns--and more money flowing back to Hollywood's coffers. In theory, the studios are supposed to pour some of this money back in the form of post-street-date advertising, but the promised ad campaigns have been few and far between, leaving the studios with even more cash on hand.

As for sellthrough, the studios are holding back on VHS and focusing on DVD--cheaper to manufacture than videocassettes, and gaining in popularity among consumers so fast that DVD sales are more than making up for any lag in VHS sellthrough sales. The end result: Even more money for the studios.

Hollywood and other retailers can bellyache all they want about revenue-sharing. The studios know a good thing when they see one, and you can bet your bottom dollar they're going to milk revenue-sharing for all it's worth--and for as long as they can.


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

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