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Why Rev-Sharing Is Back

28 Apr, 2003 By: Thomas K. Arnold

Nearly six years after Blockbuster's quest to bring in vast quantities of hits on the cheap triggered an industrywide phenomenon, revenue-sharing is as pervasive as it ever was. But it has a new aim: boosting sales of secondary titles.

After a brief lull, most major video rental chains again have direct revenue-sharing deals with the big studios, while distributors are once again being asked to offer independent dealers the chance to bring in new releases for a few dollars each in return for a share of the rental proceeds.

The terms for these deals, most of which include DVD as well as VHS, are increasingly liberal. Under one such deal, the total return to the studio could be as little as $12 per DVD, with selloff windows of as little as 28 days or less.

Benjamin Feingold, president of Columbia TriStar Home Entertainment, encourages the resurgence of interest in revenue-sharing, a business his studio, for one, has never left. “We're in constant contact with the key chains,” he said. “If the price is right, they're interested.”

But several other studios are giving revenue-sharing a renewed push. Among them is Warner Home Video, which has tapped Rentrak Corp. to take care of auditing and reporting duties.

The Warner and Columbia TriStar revenue-sharing deals include DVD, common to new deals. On the major-studio side, only Paramount Home Entertainment and Universal Studios Home Video limit their revenue-sharing to VHS.

Aside from DVD, however, there's a fundamental difference between the new revenue-sharing model and the version studios were offering in the late 1990s. Originally, studio-direct revenue-sharing was a means to boost customer satisfaction by ensuring retailers had sufficient copies of the hot new releases. Selling secondary titles, generally under output terms, was an afterthought. Today, selling secondary titles is what it's all about. With the VHS videocassette fading fast — and, with it, the concept of rental pricing — there's no longer an exclusive window for rental dealers, studio executives say. Gone, with that rental window, are the artificially high prices studios used to command for so-called “rental titles.”

With DVD, the great leveler, such secondary titles as Children of the Corn IV are in competition for retail dollars with the latest theatrical blockbuster. Studios are hoping generous output deals, with significantly more liberal terms and drastically shorter selloff windows, will keep the market for secondary titles alive.

One high-ranking studio executive said the key to making revenue-sharing work is to keep the total cash outlay — upfront fee, plus minimum split — “significantly lower” than the wholesale cost for the same video, which in the case of DVD typically runs in the $16 to $17 range. Granted, the studio doesn't make nearly as much as it did when rental titles, on VHS, commanded a premium of as much as $70, but it's better than nothing, he said. “Otherwise, we'd see sales of secondary titles fall off to the point it would no longer make sense to release them,” he said.

For big rental chains that pride themselves on selection, the fact that their net cost per unit can be less than the wholesale cost is an attractive proposition, particularly given cash-flow concerns inherent in today's down economy.

“We can bring in more copies at a typically lower cost, and that not only gives you more copies to rent, but also more to sell off,” said Bo Loyd, SVP of purchasing and product management for Dothan, Ala.-based Movie Gallery.

This is not to imply that the studios are taking it in the shorts. Another studio executive said that while certain secondary titles under these new, more liberal terms have brought in total proceeds of as little as $12 apiece, some have brought returns of as high as $35.

Retailers might ask why they should rev-share if they can buy DVDs for about half that amount, the executive said. “But that's the whole point,” Loyd said. “You don't know how it's going to perform until it's actually on the shelf.”

Tom Hannah, owner of Video Quest in Joliet, Ill., isn't swayed. He said he's already buying more secondary titles than in the VHS days because of the low price, and that for a single store, rev-sharing simply “is not worth the hassles.”

“In the late 1990s we could not make money on most ‘B' titles because the studios priced them too high,” he said. “Back then I passed on most ‘B' titles and picked up used copies from the big chains when they were available. With DVD pricing where it is today, I bring in many more ‘B' titles and spend more money.”

The president of one major-studio home video division agrees. While his studio does offer revenue-sharing deals, they do not include DVD. “I think the economics of the [DVD] business are sellthrough-oriented,” he said. “Let the rentailer decide what's appropriate, and buy accordingly.”

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