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20 Jul, 2001 By: Seth Goldstein

Beleaguered distributors are watching their bread-and-butter sales — video rentals — vanish. In the process, a lot of them have vanished as well.

The National Association of Video Distributors (NAVD) counts eight members today, including one Canadian; five years ago, there were more than a dozen. Several survivors are considered vulnerable, most obviouslypublicly held Valley Media, whose red-ink woes are in black and white for everyone to read, although they’ve staged a comeback of sorts. Others are suffering in private.

“My revenues are down 25% this year compared to last and the same amount in 2000 compared to 1999,” says one distributor c.e.o. “Themom-and-pop stores are disappearing faster than cocaine at a Hollywoodparty.” He’s responded by cutting branches and people, he says.

Even industry leader Ingram Entertainment — which has an exclusive fulfillment deal with Warner Home Video and is one of only two distributors handling the full Universal Studios Home Video line — is not immune from the crunch. The company has recently laid off 83 staffers and shuttered a sales office after it was hit by potential budgetshortfalls.

Ironically, it’s some of their customers who squeeze distribution the hardest. Retailers acting as subdistributors are competing against their suppliers — and they’re causing a rift between NAVD and the Video Software Dealers Association. The VSDA considers sideways selling a form of lifesupport for smaller stores. NAVD argues the subs “can make more money than we can,” says a wholesaler.

David Ingram, president of Ingram Entertainment, vented his anger against sideways selling in an interview with Video Store Magazineearlier this month. He blasted sideways selling as “the biggest reason”behind traditional distribution’s hard times. And he placed the blamesquarely on the shoulders of the studios, for instituting copy-depth programs that aren’t well audited.

As far back as April 2000, Bill Burton, executive director of the NAVD,told Video Store Magazine, “Profitability certainly couldn’t go muchlower” and that copy-depth programs siphon off sales by enabling “every retailer to be a distributor.”

Every distribution and studio executive interviewed for this story requested anonymity, when they were willing to comment at all. The pain can be palpable for those that did. Says one distributor: “All you needis a paragraph to describe this business. If we had to [start] over again, none of us would be in it.”

Wholesalers have been hurt three ways: by major retail chain deals to buy direct from the studios, by copy-depth programs, and by the Warner and Universal strategies to either eliminate or greatly curtailwholesaler participation.

Although lawsuits and market pressures could force changes down the road, nothing will change in the near term,sources indicate. A Universal boycott fizzled, admits Todd Zaganiacz of Video Zone and the New England Buyers Group. “We didn’t get muchsupport,” he says. “Basically we were cutting our own throats.”

“These studio programs are creating a situation where everyone’s a subdistributor,” an observer says. Stores buy for resale to other stores, often making wholesalers jump through hoops. “It has reached the point where some retailers demand they get product ahead of street dateso they can get releases to their customers on time,” a distributor says. As many as 100 companies have been formed “for the sole purpose of getting extra goods,” another source estimates.

The vast majority is scarcely visible in storefronts but swings weight on the Web. MetaExchange in Emeryville, Calif., reputedly one of thebiggest subdistributors, hosts a site on which about 250 buyers and sellers can meet to swap cassettes. C.e.o. Jonathan Hubbard says he’s been a VHS middleman since December. As a VSDA member, MetaExchange haslegitimate access to the names of retailers. According to VSDA v.p. Sean Bersell: “Under the First Sale Doctrine, an owner has the right to rent, sell or give copies away. What subdistributors do isn’t illegal or unethical.”

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