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TRIAL UPDATE: Antioco Calls Price Comparisons A 'Gross Distortion'

26 Jun, 2002 By: Joan Villa

SAN ANTONIO – Comparisons of terms that studios gave independent retailers to those given to Blockbuster Video are a “gross distortion,” Blockbuster chairman and CEO John Antioco testified today in exchanges that sometimes grew heated.

“It gave us a significant advantage over the way the entire industry was doing business to begin with, and I believe it gave us a significant advantage over our competitors who chose not to do copy depth, ” he said.

Plaintiffs' attorney Stephen Hackerman went to work to establish that Blockbuster's revenue-sharing deals were the critical and necessary element in the company's efforts to right its financial ship in 1997 after several years of poor performance and at independents' expense.

Antioco would only concede that they were an important part of the company's overall strategy and that its success in market share also included other initiatives such as store expansion. He insisted that Blockbuster competitors had options available to them to exact more favorable unit pricing as well.

Using a chart based on data from six studios, Hackerman compared the average unit prices Blockbuster and independents paid for movies between 1998 and 2000 and said Blockbuster's revenue-sharing deals let the megaretailer have average unit prices ranging from $17 to $26 depending on studio, while independents paid between $39 and $49 per unit.

Antioco called those numbers “a gross distortion of reality,” claiming the average prices independents paid included a wide variety of pricing deals and plans, or no plans for that matter, while Blockbuster's involved revenue-sharing.

Blockbuster also used similar average unit cost as a way to analyze its own success before and after revenue-sharing Hackerman countered, citing an internal Blockbuster document that showed in 1997, before revenue-sharing, Blockbuster's average unit cost was $60.98, while in 1998 it had dropped to $27.09 and in 1999 to $25.64

Hackerman pointed out cautionary language in Blockbuster's annual reports that said in effect that if Blockbuster's revenue-sharing deals were discontinued, it would materially impact the company because Blockbuster would be forced to pay higher wholesale prices or buy fewer copies. That, said Hackerman, indicates the company had no other significant options to improving its financial condition.

Earlier in the day, economics expert and Stanford University Prof. James Sweeney said he concluded from studying studio agreements that Blockbuster's average movie acquisition costs were about 12 percent less overall than pricing terms offered through wholesalers.

"That's big," he said. "It could make the difference between viability and bankruptcy" for independents.

Sweeney attributed the price difference to a "set of decisions" studios made to withhold competitive revenue-sharing terms from independents, rather than market conditions. Such "parallel activity" on the part of all studios, acting against individual self-interest but benefiting the group as a whole, is what economists look for in collusive behavior or conspiracy, he explained.

"The parallel activity was a failure to provide contracts to independents through distribution or any other means that would allow them to have a cost of goods nearly equivalent to Blockbuster," Sweeney said.

Pricing contracts often contained "subtle but very important differences" in terms between what a retailer might pay through revenue-sharing distributor Rentrak and what Blockbuster paid in output agreements with studios beginning in 1997, he said.

"The terms were different, the revenue split was different and that's why I conclude these were very different," he emphasized. "They're not the same deal."

For example, Rentrak required a minimum transaction fee of $1.20 to $1.40 per rental from independent retailers, while Blockbuster's transaction fees were applied to average purchases for a given title, he said. This meant that independents who offered free rental coupons or specials such as "rent two, get one free" would still be required to pay transaction revenue to Rentrak on the free rentals, while Blockbuster's fee would not include such offers, he testified.

Early in his cross-examination, defense attorney Lee Godfrey disputed many of Sweeney's findings and argued that Blockbuster's deals through Warner Home Video and MGM Home Entertainment actually produced higher cost of goods for Blockbuster than for wholesalers.

Godfrey also questioned that Sweeney's analysis looked at the overall market rather than the specific market areas, purchases or prices paid by the three individual plaintiffs in the case: John Merchant of 49'er Video in Sacramento, Ron Cleveland of Lonestar Video in San Antonio and David Stevenson of The Big Picture Video in Syracuse, N.Y.

After unexpectedly paring down their witness list, plaintiffs expect to conclude their case today after calling their final witness, Blockbuster CEO John Antioco. Cut from the list of scheduled witnesses was Ben Feingold, president of Columbia TriStar Home Entertainment, and taped depositions from Blockbuster executive Dean Wilson and distributor Ron Eisenberg of ETD.

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