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UPDATE: Blockbuster Pressuring Studios to Sweeten the Pot

27 Jul, 2001 By: Seth Goldstein

Blockbuster is reassessing its VHS copy-depth deals as they come up for renewal with an eye on increasing its DVD investment, chairman JohnAntioco told analysts during a quarterly conference call earlier this week.

The chain reported a second-quarter net loss of $15.6 million, compared to $27.9 million of red ink in the same period last year. Cash earnings rose to $26.3 million from $13.8 million on revenues of $1.23 billion,slightly above 2000's $1.21 billion.

It's to the chain's advantage to “modify or lapse revenue-sharing agreements,” Antioco said. “These conversations are active.”

Although it's not cutting back on hit title cassette inventory, Blockbuster wants to make still more room for DVD, which should accountfor 30% of revenues by year's end, nearly double the current 16%, he said. Disc margins are in the 70% range, about 10 percentage points higher than VHS. “DVD is our growth engine,” Antioconoted. Experts predict the installed base of players will jump to 24 million this year or 25% of American households.

“What [Antioco] is doing is using DVD to pressure the studios into doing what he wants,” says stock analyst Dennis McAlpine of Auerbach, Pollack & Richardson in New York. “His big concern has got to be DVDs listing for $25 that are selling for $15 at Best Buy. That has got to be killing him. That's why he's pushing rentals so hard. With DVD at 30% of revenues, he's telling them, ‘You'd better do it now.’

Blockbuster has come out publicly in favor of a rental window for DVD. Blockbuster already has 45% of DVD rentals in the United Statesand is working hard to become the dominant force overseas.

Although industry insiders speculate that Disney and Twentieth Century Fox are the deals in question, Antioco did not specify which rev-share contracts were coming under scrutiny or how they might be altered.

“These deals have a number of significant components,” Antioco said, including upfront costs, quantities purchased, the studio-Blockbuster split and the extent Blockbuster is committed to buying most or all of a vendor's new releases.

“Total output arrangements may not make sense in light of” DVD's rapid growth, says Blockbuster spokeswoman Karen Raskopf.

“We've already made adjustments to some deals,” Antioco told Video StoreMagazine. “They reflect the right thing to do for all parties involved.”

Antioco did acknowledge that as studios endorse DVD revenue-sharing, the margin advantage over VHS will shrink. But Blockbuster should make up the difference with increased rentals once consumers are guaranteed hittitles are in stock, as VHS programs have done. “I don't expect a rental window [for DVD] without revenue-sharing,” Antioco says. However, “we probably won't see any change... until 2002 at the earliest.”

Antioco has no doubts rental will dictate DVD's future. “Consumers havespoken loudly, clearly and repeatedly that they watch a movie once. That dynamic will continue,” he told analysts. Blockbuster's ratio of VHS rental to sales is 12 to one, DVD only two or three to one, so “the ratio will continue to favor rental,” he said.

Antioco agreed Hollywood still needs much convincing, noting there are two studio camps, one for the rental DVD model and one for the currentsellthrough model.

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