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Redstone: Blockbuster Never Sought Exclusive Deals

13 Jun, 2002 By: Joan Villa

SAN ANTONIO –Blockbuster Video's revenue sharing deals struck with Hollywood studios as far back as 1997 were not intended to be exclusive or discriminatory against other retailers, and were just one part of the strategy to improve the company's business, Viacom chairman Sumner Redstone maintained in court today.

The aging media mogul endured tough questioning by plaintiff lawyers in the second day of the antitrust trial independent retailers brought against six Hollywood studios and Blockbuster.

Three independent retailers are finally getting their day in court after years of alleging Blockbuster enjoyed favorable pricing terms on videos the indies claim movie studios did not make available to all retailers.

A dozen high-level studio and Blockbuster executives filed into U.S. District Court on the opening day, of the antitrust trial, while Judge Edward Prado moved swiftly to empanel eight jurors and complete opening arguments.

Redstone, called to support the plaintiffs' case, is the first witness (Viacom is parent to Blockbuster). Under questioning from plaintiff's lawyer Steve Hackerman, he held to his position throughout his testimony, Plaintiffs, meanwhile, sought to show that Blockbuster's revenue-sharing deals allowed the company to get far better pricing than was available to other retailers, and that these deals significantly improved the chain's market position.

The defense produced Blockbuster internal documents that analyzed the impact of the revenue-sharing deals that showed they helped reduce Blockbuster's unit costs by some 56 percent. According to the analysis, average cost per tape in 1997 for Blockbuster was $60.98, but had declined to $27.09 by 1998 and 25.64 in 1999.

Confronted with this, Redstone did not deny the positive impact of the revenue sharing programs. ”That's the cost we paid,” he responded to Hackerman. “The whole model we developed was so we paid less to have more copies in store and satisfy the customer. This has nothing to do with discriminating against your clients.”

Under cross-examination, Redstone later denied Blockbuster sought to make these deals exclusive. Defense attorney Lee Godfrey went down the list of defendant studios and asked the Viacom chief whether there had been any “exclusive” deals with the studios. To each, Redstone replied no. “I never asked it. Nobody offered it to me, and I never received it,” Redstone said.

In questioning, Redstone maintained the company was struggling in 1997 and revenue-sharing was one, albeit it critical, step the company took to improve its position. Other measures included opening more stores, committing $100 million in advertising, expanding inventory and attracting better employees with higher pay. And he added that the company invested as much as $50 million in a well-known test of the revenue sharing program conducted in Blockbuster stores in six cities in 1997 seeking to convince studios that such a program could generate greater volume to offset the lower up-front revenues the studios would receive in revenue sharing deals.

The plaintiffs, seeking to establish Blockbuster's competitive advantage with its revenue sharing deals, asked why the company did not consider going with the revenue sharing programs offered to the rest of the industry through Rentrak, Redstone agreed that the 45 percent retailers kept in those programs was not good enough for Blockbuster. It's deals with studios, according to evidence introduced in court, allowed it to keep between 55 percent to as high as 62 percent of revenues generated.

Redstone said it was a straightforward attempt to improve business. “I was looking for [the studios] to help us by giving us more tapes, but not charging us any more money, which in effect would cut the price of those tapes,” he said.

Redstone, himself a former attorney with antitrust experience, was asked point blank by defense attorney Ricardo Cedillo, whether Redstone, given his legal experience, would have known if he was breaking any laws in developing these deals with the studios, to which Redstone said “You don't have to be a lawyer to know it.”

In opening arguments Wednesday, defense attorney Cedillo laid the groundwork for Redstone's testimony.

"Nobody broke any laws here, we just worked hard" for Blockbuster's success, he argued. While revenue-sharing was "an innovation" on the part of Blockbuster, the agreements that will be presented in court were reached independently and contained different terms for each studio, he said.

"Antitrust laws are designed to protect competition, not the competitors," Cedillo concluded. "Just because you've got a winner doesn't mean someone who came in second or third or last has to be conspired against."

But plaintiff attorney Hackerman noted Blockbuster's climbing market share -- from 24 percent in 1997 to about 40 percent today -- represents more than $1 billion in revenue he says was taken "out of the pocket" of independent retailers.

"In 1998 the world changed," he told the five female and three male jurors. "After entering into these deals with the studios, Blockbuster all of a sudden began taking huge business from independents."

In meeting with studios in summer 1997 to suggest the new revenue-sharing model, Hackerman alleged, Redstone needed "more than a new deal, he needed an advantage" of low pricing that would enable Blockbuster to purchase vast quantities of new releases and satisfy customer demand. "He needed a deal the independents didn't get and the evidence will show that's what he got," Hackerman contended.

According to internal documents the plaintiffs intend to produce during trial, various studios had competitors' pricing terms in their files, he said. A memo to Disney chief Michael Eisner outlined the studio's plan "to give Blockbuster a new model" that would be rolled out only to a handful of larger chains.

A Warner Home Video summary of a Redstone meeting warned that "what Mr. Redstone is requesting could spur a government investigation into the video rental industry," Hackerman said. "Studio by studio we're going to show you the evidence. They knew exactly what they were doing -- that was the plan." Defense attorney Lee Godfrey, representing Columbia TriStar but delivering opening statements on behalf of the other studios as well, argued the alleged conspiracy "makes absolutely no sense."

He also countered plaintiffs' charges that Blockbuster pays an average of $23 per movie versus independents' $65 as "a false comparison" because revenue sharing and flat-out purchase are "totally different" pricing mechanisms.

"In the three years leading up to 'new model' revenue-sharing, [plaintiff] Lonestar Video lost money," he said. "Whatever was happening with that store had nothing to do with some alleged conspiracy that was supposed to have happened in 1998."

Warner and MGM Home Entertainment reached a settlement with plaintiffs and are no longer defendants in this trial or a similar case pending in Los Angeles Superior Court. Plaintiffs are Ron Cleveland of Lonestar Video in San Antonio, David Stevenson of The Big Picture Video in Syracuse, N.Y., and John Merchant of 49'er Video in Sacramento, Calif.

To read about Warren Lieberfarb's taped testimony or indie John Merchant's turn on the stand, click here.

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