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Warner Floats New Rev-Share Deal With DVD

By : Thomas K. Arnold | Posted: 10 Feb 2003

Warner Home Video has quietly crafted a new revenue-sharing program that includes DVD, Video Store Magazin has learned.

Like similar programs already in place at two other studios, the incentive for retailers is that the total payout, upfront fee plus guarantee, is less than the wholesale price -- but only under output terms.

Warner executives won't comment, but insiders say two major video rental chains -- Hollywood Video and Movie Gallery -- are close to signing up for the deal, which is also being shopped to other large retailers, including Blockbuster and Hastings.

One insider said copies of the deal were sent, unsolicited, to a handful of large rental chains, although all retailers, regardless of size, may participate through Ingram and VPD, the two distributors pegged to carry Warner product under the old Warner Rental Direct program. Distributors get the same terms as the big retail chains and are allowed a slight markup.

“It's a sensitive issue, because you can't get to every retailer in the nation,” the insider said.

Details of the program and the terms were not available at press time. But sources say it is structured similar to DVD revenue-sharing programs offered by Columbia TriStar Home Entertainment and MGM Home Entertainment. In each case, retailers share revenue on all product, mixing DVDs with cassettes. The Warner deal is available only on an output basis; retailers pay minimal upfront fees and guarantees that together amount to less than the wholesale price they would pay if they purchased the discs or cassettes outright.

More studios will likely pursue DVD revenue-sharing deals this year, said analyst Tom Adams of Adams Media Research, in part because they are realizing less rental revenue from DVD than from the higher-priced videocassettes that mostly fall under rev-share agreements. But for retailers there's “no inherent advantage” when DVD units cost them $15 to $16, he said. “The issue is, how strong will rentals at the top line remain?” Adams said.

Even if consumer spending stays strong, the shift to DVD and cheaper inventory could make supplier revenue plummet, Adams said. In that case, studios will want to negotiate deals that help generate a reliable return from the movies they release, while retailers must be willing to experiment to find win-win terms for both sides. “Once DVD gets to 60 percent to 70 percent penetration and VHS settles into a niche category, then the deals can settle into a given range of pricing,” Adams said. “But it's going to take a couple years of experimentation and adjusting to a rapidly changing picture.”

Several industry executives participating in this week's VSM roundtable (see cover) see DVD revenue-sharing as part of an inevitable path toward stabilizing the rental business as it migrates toward DVD. “A test of a rental window appears inevitable,” said VSDA president Bo Andersen. “It must be accompanied by aggressive and equitable revenue-sharing terms and simplified copy-depth programs, or rentailers will underbuy.”

Additional reporting by Kurt Indvik and Joan Villa.



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