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UPDATE: Rentrak Signs Its First DVD Rev-Share Deal; Reports 5% Lower Q2 Revenues

8 Nov, 2001 By: Joan Villa

Distributor Rentrak Corp. has signed a first-ever DVD revenue-sharing deal that gives retailers the option of stocking any combination of MGM Home Entertainment's new releases in VHS or DVD units with no upfront cost.

The deal was hailed by Rentrak chairman and c.e.o. Paul Rosenbaum on an earnings conference call for opening up the lucrative DVD market to the pay-per-transaction distributor. He estimates that 20% to 25% of the rental business has shifted to DVD but Rentrak was unable to take advantage of the additional revenue until now, he says.

”An attractive revenue-share model for DVD has now been created,” notes Rosenbaum, anticipating that other studios may follow suit. “If Rentrak can capture the business we lost in the rental market because of the DVD issue, we can expect significant increase in earnings.”

MGM's previous terms let retailers keep 60% of VHS rental revenues, while also requiring an upfront fee of $4 to $5 per tape as part of an “output” contract requiring minimum purchases on all VHS rental releases. The new deal, which will begin with the January titles What's the Worst That Could Happen? with Danny DeVito and Martin Lawrence and the $40-million box office thriller Jeepers Creepers, lets retailers take some or all of their allotment in DVD units with no upfront cost and a 58%-42% split, say retail sources. Total revenue paid to Rentrak is capped at $35 per unit.

“The point is we can determine we need the 40 copies and let us split it up however we want,” explains one retailer. “In the past you had to buy 40 copies of VHS and still had to buy DVD units also.”

The back-end payments are considerably more complicated, however. Doug Aita, owner of Tape King in Bozeman, Mt., says the new terms “change everything” because MGM will now calculate DVD into purchase goals without upfront fees, but require retailers who choose to sell off half of their DVD inventory after 31 days to return 45% of those previously viewed sales.

“We've been getting $12 to $13 for used PVTs, so that translates into $6 on payoff, and when you couple that with the rental payments, it gets real close to what we can buy DVDs for,” observes Aita. “I haven't crunched the numbers enough yet” to decide whether he favors the deal.

However, all Rentrak retailers will have to convert to the new terms before next June, when MGM's output contracts expire. Then, “if you want to rev share you have to rev share both formats,” Aita notes. “That's the Trojan horse.”

Rosenbaum declined to provide specific terms of the MGM agreement. MGM's executive sales v.p. Robert Wittenberg was traveling and unavailable for comment.

In its second quarter ended Sept. 30, Rentrak reported 5% lower revenues of $23.7 million resulting in net earnings of $398,114, or 4 cents a share, compared to a net loss of $9.6 million in the year-ago quarter.

Excluding losses incurred by Internet fulfillment division 3PF, Rentrak's earnings from its entertainment sector, including pay-per-transaction and Blowout Video, would have been 11 cents per share, Rosenbaum says. 3PF revenues were $2.5 million in the second quarter, down 47% from the year-ago period.

Rentrak concluded the quarter with $4.3 million in cash and no debt, allowing the company to internally fund any new concerns, he adds. Rentrak recently repurchased just under 200,000 shares of stock as part of a buyback program, and earnings per share in the upcoming third quarter will benefit from the lower 9.6 million shares as compared with a weighted average of 11 million shares in the second quarter, he says.

Looking forward, Rentrak affirmed annual earnings expectations of 80 cents to 85 cents per share. Rosenbaum says the distributor saw a 9% revenue boost from a 28% increase in video cassette shipments during the quarter, but he expects most of those transaction revenues to be recorded over a 90-day period that extends into the current quarter.

“We anticipate continued prosperity for the third and fourth quarters” extending into 2002, he adds.

Rosenbaum says the company is “on schedule” to test its DigiTrak transaction processing software for video-on-demand and other digital download applications.

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