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Warner Tried To Link Rev-Sharing To DVD Format Shift

14 Jun, 2002 By: Joan Villa

SAN ANTONIO -- Warner Home Video tried to tie revenue-sharing deals with Blockbuster to an agreement that Blockbuster's sister company, Paramount Home Entertainment, would release movies in the new DVD format, the supplier's president Warren Lieberfarb testified in a taped deposition shown in the second day of an antitrust trial in U.S. District Court.

Lieberfarb denied, however, that Warner consulted with any studios in setting revenue-sharing terms and said he directed his staff that any changes to Blockbuster's pricing would have to be offered to others.

"All of the agreements that we and Blockbuster attempted to conclude had a condition that Paramount would make its product available on DVD," acknowledged Lieberfarb.

Although Warner had an interest in promoting the new format, the studio ultimately "failed" in getting the DVD concession, he said. " I entered into a revenue-sharing agreement based on sound independent business judgment that revenue-sharing was in the interests of our customers, consumers and our own self," he testified in the deposition taken last June.

But in a line of questioning intended to show that studios did not act independently in setting pricing for independent retailers, plaintiffs' attorney Steve Hackerman produced an internal memo from Warner sales executive John Quinn that recommended Warner "follow the lead" of terms proposed by Buena Vista Home Entertainment.

"The current option for revenue-sharing has retailers keeping 45 percent of the revenue, with 45 percent to the studio and 10 percent to the distributor," the memo said. "Disney's proposal has the retailer keeping 50 percent, 45 percent to the studio, 2 percent to the agent and 3 percent to the distributor. We recommend following their lead, and proposing the same split."

Hackerman produced another internal summary from May 1997, of a meeting set among Quinn, Cardwell and Lieberfarb that outlined "risks" of proposed revenue-sharing with Blockbuster.

"Those retailers buying through distribution would respond negatively to the real or perceived idea that Blockbuster was buying product substantially lower than the competition," the memo stated. It also warned that such deals could "spur government inquiry into video industry pricing practices."

Warner settled with plaintiffs and is no longer a defendant in the case, but the studio's testimony was included to address charges of price fixing and horizontal and vertical conspiracy. Defendants are Blockbuster, 20th Century Fox Home Entertainment, Buena Vista, Columbia TriStar Home Entertainment, Universal Studios Home Video, Paramount and parent Viacom Inc.

Retailer John Merchant, one of the three plaintiffs in the case, testified he built five-store 49'er Video in Sacramento, Calif., during the 1990s and competed successfully as several new Blockbuster stores opened around his locations. After Blockbuster initiated its revenue-sharing programs, however, and used Sacramento to test copy depth with guaranteed rentals, he closed all stores but one and filed for bankruptcy.

"My business declined dramatically," he said. "I took 20 percent to 30 percent hits in my gross revenue." Merchant faces cross examination Friday.

Read about Viacom chief Sumner Redstone's testimony here.

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