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The Return of Revenue-Sharing

10 May, 2002 By: Joan Villa

In conjunction with its decision to take major accounts direct and limit distribution, Columbia TriStar Home Entertainment will roll out a new revenue-sharing program in the fall that will combine DVD and VHS.

Buena Vista Home Entertainment, meanwhile, is making a renewed pitch for revenue-sharing on rental VHS cassettes.

Executives from Columbia TriStar and Buena Vista declined comment.

According to a memo sent to distributors by a Columbia executive, “as of the fall, we're going to offer a new revenue-share program that will combine DVD and VHS.” The memo said retailers will be given a single revenue goal for each title covering both VHS and DVD units, and that further details will follow. A breakdown of the revenue-sharing split between retail and the studio has yet to be finalized, the sales executive noted in the memo.

The studio told wholesalers last month that it would continue to provide product to Ingram Entertainment and VPD, but by summer it would cut shipments to Baker & Taylor, WaxWorks, Flash Distributors and music one-stops Alliance Entertainment, Entertainment Resources, Eurpac and KSG.

The distributors who were eliminated were told they could continue to purchase product through Ingram and VPD, sources said.

Distributors received another memo from Buena Vista's Paul Pasquarelli, dated May 8, in which the sales executive said June titles Kate & Leopold, The Shipping News, Behind the Sun and Beneath Loch Ness will be available through revenue-sharing.

According to the memo, “It is the understanding of the parties that this revenue-sharing agreement is being made in anticipation of, but not dependent on, the consummation of a longer-term revenue-sharing agreement governing future Disney titles.” It is unclear whether Disney will offer rental cassettes only through revenue-sharing, or through traditional terms as well.

Distributors are provided with a matrix, dictating minimum buys for various store sizes. They pay $4 per title up front, track rental revenue for 26 weeks and pay Buena Vista 45 percent of rental proceeds, an average of $1.20 per transaction, during that period.

Ingram and VPD would not comment on the Columbia TriStar plan. However, a distributor who reportedly contacted Ingram and VPD last week to set up an account was told the program would begin July 1, but that the two wholesalers would only be able to supply Columbia product for “a couple of months,” the distributor said. The studio would implement “a new way of selling” in the fall and would no longer allow VPD and Ingram to supply other distributors, music one-stops or subdistributors, the source said.

The move is an apparent attempt to recoup studio revenue lost in the recent rapid transition from the VHS rental model to lower-priced DVD units, industry analysts said. Those sellthrough-priced DVD units are widely stocked by rental stores who don't share that rental revenue with the studios.

“The economics of VHS were more favorable to the studios than the economics of DVD,” explained Greg Durkin, research director for Alexander & Associates. “Studios' share of the overall spending on DVD product is smaller than their share of overall spending on VHS product.”

With a strong lineup of hit titles that includes Spider-Man, Panic Room and the upcoming Enough with Jennifer Lopez, Columbia may be seeking to squeeze maximum revenue while it has the opportunity, sources say.

By shifting now to combine VHS and DVD goals to essentially force rentailers into revenue-sharing DVD, while tightening direct relationships and limiting distribution, the studio can earn more revenue than it would from allowing the outright sale of its hits on DVD.

“They're adjusting their economics and their financial plan to prepare for this flood of product that's coming in so they can capitalize most on that product when it does come to market,” said Durkin. “Maybe they can get 50 cents on the [retail] dollar rather than like it is right now, something like 40 cents or 30 cents.”

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