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The Year in Review

2 Jan, 2003 By: Thomas K. Arnold

The year begins on a positive note: Video Update's 324 remaining stores make it through a protracted bankruptcy and emerge as a fully owned subsidiary of Movie Gallery. The deal increases the Dothan, Ala.-based rental chain's store base by nearly 30 percent, from 1,090 to 1,410 locations.

Video Store Magazine learns Blockbuster Inc. operated two sellthrough-only “test” stores during the holiday season to dump thousands of used VHS tapes. The surplus came as a result of the chain's various revenue-sharing programs as well as its growing emphasis on DVD.

Warner Home Video releases two more moderately grossing films at a sellthrough price on both DVD and VHS, fueling speculation that the studio is phasing out rental pricing. The decision to price cassettes of Training Day and Heist at $22.98 and $19.96, respectively, follows the release late last year of the Swordfish cassette at a sellthrough price, even though the film grossed far less than the customary $100 million threshold.

Independent retailers lose a round in their price-fixing suit against Blockbuster and the studios when a California judge denies them class certification. In a 24-page ruling, Judge Victoria Chaney determines that the 200 retailers who filed the suit in Los Angeles Superior Court failed to adequately prove the price-fixing charges that would have made class certification legally possible.

At the annual Consumer Electronics Show in Las Vegas, the Consumer Electronics Association predicts DVD players will outsell VCRs this year, 16.25 million vs. 14.45 million.

After six months and an investment of $10 million, Radio Shack pulls the plug on its test of consumer electronics departments within Blockbuster Video stores. The “Radio Shack Cool Things” boutiques, located in 130 Blockbuster stores in four markets, failed to produce an adequate return on investment, CEO Leonard Roberts maintains.

Troubled Kmart files for Chapter 11 bankruptcy protection, leaving a number of studios holding the bag on millions of dollars in unpaid shipped product. Top creditors include Buena Vista Home Entertainment, which is owed $56 million, and 20th Century Fox Home Entertainment, which is due $34 million. Kmart is the third-biggest discount chain and the second-biggest mass merchant video retailer, historically handling about 7 percent of total home video sales.

Four studios announce they will issue titles on digital VHS, saying they want to fill a programming void in the high-definition TV arena. Artisan, Fox, DreamWorks and Universal vow support for the format, which at one time was a serious competitor to DVD. Critics note that none of these studios have a vested interest in DVD the way Warner and Columbia TriStar do. Following the announcement by the four studios, a Warner source said: “Warner is not planning on releasing titles in this format. It doesn't have a chance of success.”

The five-studio venture to deliver video-on-demand over the Internet has a new name, Movielink, and a new CEO, former cable and satellite executive Jim Ramo. No launch date has been set for when service is to begin. MGM, Paramount, Sony, Universal and Warner Bros. are the partners in what was previously known as MovieFly.

A live Web chat with Warner Home Video executives reveals a May 28 video release date for Harry Potter and the Sorcerer's Stone, and online retailers waste no time in accepting advance orders. Bestbuy.com lists the DVD at $19.99 and offers a $10 discount on future DVD purchases to anyone who orders the title before May 27. Even wholesaler Costco is taking orders online, offering the much-anticipated DVD for $17.49 on its Web site.

Blockbuster chief John Antioco says his chain's share of the DVD rental market is now higher than its share of the VHS rental market. “More than 60 percent of U.S. DVD households rented from us last year,” he notes. Antioco's comments come as Blockbuster announces a slight fourth-quarter revenue uptick of 1.3 percent, to $1.36 billion, boosting full-year 2001 revenue to $5.16 billion, up 4 percent from 2000. Antioco says Blockbuster will open 300 stores this year and expand its DVD and video game inventories.

Hollywood Entertainment Corp., the nation's No. 2 video rental chain, reports solid gains for the fourth quarter and says it is ready to expand again, after an 18-month moratorium on new-store openings. Hollywood executives attribute the rosy financials to significant gains in the DVD and video game markets.

Faced with slumping CD and cassette sales, music retailers are turning more and more to DVD as their salvation. That's the underlying message at this year's National Association of Recording Merchandisers convention in San Francisco, a somber affair that found independent retailers scrambling to cut deals with DVD suppliers. “DVD is taking over your business,” veteran analyst Harold Vogel tells music dealers. The convention comes just after the Recording Industry Association of America reports a dramatic decline in CD and cassette shipments during calendar 2001. CD shipments were off by 10 percent, while cassette shipments plummeted 40 percent.

Reflecting the lightning-like growth of DVD, two big replicators announce plans for major expansion and acquisitions designed to boost their production capacities by tens of millions of units per year. Movement includes the acquisition by Technicolor of Panasonic Disc Services in a deal valued at $261 million.

DVD helped boost video revenue to the Hollywood studios by 20 percent, to $13.2 billion, in 2001, Adams Media Research reports. Analyst Tom Adams, a former Video Store Magazine editor, says consumer spending on video rose 9 percent and shifted heavily toward sellthrough.

Netflix, the online DVD rental service that pioneered the monthly “subscription” model, files for an initial public stock offering in the hopes of raising $115 million. For about $20 a month, Netflix lets its customers rent as many DVDs as they want, with the stipulation that they have no more than three discs out at any one time. The company has more than 500,000 subscribers, including Secretary of State Colin Powell.

A week after announcing the release of another Super Bowl video, USA Home Entertainment says it's being dissolved. About 20 people will be laid off, including president Joe Amodei. Universal Studios Home Video will take over distribution of USA Films titles, beginning with Gosford Park, nominated for seven Oscars. The shuttering of USA Home Entertainment, formerly PolyGram Video, comes after Universal parent Vivendi Universal's pending acquisition of USA Networks' entertainment assets.

Borders bookstores says it is phasing out most of its VHS titles to concentrate on DVD, with new stores carrying only cassettes of children's, fitness and high-profile theatrical releases. VHS inventories are being liquidated at all Borders locations, video buyer Dan Bogucki says.

Hollywood Entertainment Corp. says it is beefing up its DVD inventories to the point where in many stores there is now an even split between DVD and VHS.

New Line Home Entertainment announces it will release two separate DVD editions of The Lord of the Rings: The Fellowship of the Ring: a two-disc set, containing the theatrical cut in August, and a four-disc set with an extended version of the film in November. “New Line is positioning 'Lord of the Rings' as a year-round franchise,” company president and COO Stephen Einhorn says.

Wal-Mart announces it is the world's biggest company, with $219.81 billion in sales in fiscal 2001. At the same time, studios say Wal-Mart is their single-biggest video customer. It commands an estimated 25 percent share of the DVD market and 35 percent of the VHS market.

MGM Home Entertainment tests a flat $22.50 dealer price for both the DVD and the VHS editions of A Rumor of Angels.

Warner Home Video stuns the industry by offering to settle a pair of retailer lawsuits against the studios and Blockbuster over alleged price-fixing and antitrust violations. The Warner offer is for $14.5 million.

A sad and battered National Association of Video Distributors, with only a handful of members left, holds its annual trade conference in Los Angeles. The clout of distributors has been waning since studio-direct revenue-sharing with the major chains put thousands of independent retailers out of business, and two studios are now dealing with only two or three wholesalers. At the conference, distributors are dealt another blow when Columbia TriStar becomes the third major studio to cut back its distribution network, telling distributors only Ingram and VPD will get to carry its product by the end of summer.

The two major video rental chains -- Blockbuster and Hollywood -- announce improved first-quarter earnings on the strength of DVD and video games. Blockbuster's John Antioco announces a stepped-up commitment to games, with more copy depth, guaranteed title availability and a dramatic new layout that will cluster rentals, sales, accessories and even hardware in sections organized by game format.

Fox abruptly drops out of Movies.com, a planned video-on-demand joint venture with the Walt Disney Co. Both companies call the parting amicable.

Observers are wondering whether Microsoft's much-ballyhooed Xbox is faltering. Within days, Xbox co-creator Seamus Blackley resigns, and the company lowers its estimated global sales total for the seven months ending in June to 3.5 million to 4 million, down from its original projection of 4.5 million to 6 million. Critics attribute the poor showing to the lack of DVD playback right out of the box as is possible with competitor PlayStation 2.

Warner effectively exits the video rental business with no plans to release rental-priced videocassettes. The decision, sources say, is based on the success of sellthrough-only pricing on Swordfish, Training Day, Heist and Thirteen Ghosts. The Warner Direct sales team, formed in September 2000 to sell rental cassettes to retailers, will be redeployed to do telemarketing and other sales and promotional functions.

Street-date violations may not be generating the headlines they once were, but they continue to plague the home video industry and may in fact be increasing as the sellthrough business, driven by new-release hit movies on DVD, continues to expand. Angry retailers say studio monitoring and enforcement isn't stopping the problem.

New Line becomes the latest studio to drop list prices of certain catalog DVDs to less than $15. Warner, MGM and Columbia TriStar already offer an ample assortment of titles at that price point, while Buena Vista -- which entered the DVD market with the highest list prices in the business -- says it will bow a $9.99 list price for 24 live-action deep catalog titles in the fall.

MGM follows Warner's lead in offering to settle a pair of retailer lawsuits against Blockbuster and the studios over price-fixing and antitrust allegations. The settlement comes on the eve of the trial in the first case, which is slated to begin June 10 in San Antonio.

Sources say Warner is gearing up for its second major overhaul of distribution in two years, this time requiring wholesalers to sell the studio's DVD and VHS product to retailers by “class of trade.” Ingram would get grocery and drug stores, VPD would get rental specialists, Baker & Taylor would get e-commerce and institutional accounts, and Flash would retain control over the general New York area. WaxWorks, the fifth major distributor, would be shut out under the plan.

Harry Potter and the Sorcerer's Stone flies into retail May 28 amid a flurry of midnight store openings and other promotions, although Warner is reluctant to give out sales numbers until at least a week has passed.

A week passes, and Warner says consumers worldwide bought more than 20 million copies of Harry Potter in the title's first seven days of release -- more than any other video release since 1995's The Lion King.

Viacom chairman Sumner Redstone is the first witness to testify in the retailer price-fixing lawsuit against Blockbuster and the studios. He tells the court that the revenue-sharing deals between the studios and Blockbuster, which Viacom owns, were not intended to be exclusive or discriminatory against other retailers and were simply part of a strategy to improve the company's business.

As the trial progresses, witnesses debate the origins of revenue-sharing, with both Redstone and former Disney chief Michael Johnson testifying that they are the architects of revenue-sharing. In a taped deposition, Warner president Warren Lieberfarb insists it was Warner that initially proposed the idea to Blockbuster, even though Disney was the first studio to sign a rev-sharing pact with Big Blue, in November 1997.

At the end of the month, the suit is tossed out of court. Just as attorneys for the plaintiff retailers are wrapping up their case, U.S. District Court Judge Edward Prado dismisses the allegations, finding that the plaintiffs failed to prove the legal elements necessary to support antitrust claims. Blockbuster chief John Antioco exults in the victory, saying, “This ruling is confirmation that Blockbuster has competed fairly and honestly.”

The industry comes out to celebrate DVD's fifth birthday with a special “DVD at 5” conference in Los Angeles, produced by Video Store Magazine and the DVD Entertainment Group. Studios get awards for their contributions in making the format a big success, and Warner president Warren Lieberfarb is officially honored as the “father” of DVD.

Independent retailers, reeling from a decision by a federal judge the previous month to toss out an antitrust suit against Blockbuster and the studios, vow to press on in a similar action in Los Angeles. “California is very protective of their small businesses, and they have independent and stronger antitrust rules than even the federal authorities,” says lead plaintiff counsel Jim Moriarty.

Columbia TriStar announces that Spider-Man, the year's top movie, will be released on video Friday, Nov. 1 -- a departure from the industry standard of a Tuesday release -- much like Shrek a year ago at this time. EVP Marshall Forster says due to the film's tremendous box office tally, “We just really felt that it deserves a release date separate and apart from other releases, because we feel it's going to be the biggest film of all time.”

The 21st annual Video Software Dealers Association (VSDA) convention opens in Las Vegas, and it's nothing like previous models. It's held at an off-Strip hotel, the Rio, and the lavish studio booths that graced the show floor at previous conventions are conspicuously absent. Instead, suppliers have taken out suites, either for “open house”-style visits or private meetings. The new format draws a mixed reaction from retailers, but exhibitors are pleased with the results overall. Attendance clocks in at 4,000 “video professionals” -- about 30 percent less than at the January 2001 show.

The VSDA, suffering a sharp decline in membership, says it will launch consumer shows in a handful of midsize cities in the hopes of generating badly needed revenue. The shows will capitalize on consumer interest in DVD and promote packaged entertainment.

Hoping to tap into growing consumer interest in buying DVDs, Blockbuster announces a major push into the sellthrough business. In a conference call with analysts, chief John Antioco says that up to now, the chain has treated sellthrough as “an afterthought,” but no more. “Our plan is to triple our retail share by 2006,” Antioco tells analysts.

Meanwhile, No. 2 video rental chain Hollywood Entertainment agrees to DVD revenue-sharing with MGM and Columbia TriStar, and wants to expand the model to other studios and even games, CEO and president Mark Wattles tells analysts on his second-quarter earnings call.

Warner Home Video's record revenue of $1 billion helps save the day at troubled AOL Time Warner as the huge media conglomerate posts its first quarterly profit since the completion of its merger. The company's financial release says the filmed entertainment's good showing “is primarily driven” by video sales.

Faced with an exceptionally busy fourth quarter, Columbia TriStar delays its distribution realignment until January or February. Distributors and one-stops will still be able to buy the studio's titles, including such big hits as Spider-Man and Men in Black II, at or near wholesale prices, with the stipulation that they bring their accounts current and place their orders through the studio's two designated agents: VPD and Ingram Entertainment.

Following a similar announcement by Blockbuster, Movie Gallery, the country's third-largest video rental chain, says it, too, will seek to grow its share of the burgeoning sellthrough market and at the same time commit $2 million to boosting its video game rental inventory. The chain also announces that 324 Video Update stores it purchased earlier in the year will be fully converted, with Movie Gallery signage, by the spring of 2003.

The VSDA trims six employees from its work force, including longtime financial chief Richard Nissenbaum, in an attempt to cut costs. Earlier in the year, the association's board approved a three-year plan to reduce a budget deficit.

Retailers are giving a mixed reaction to the wealth of 9/11 videos coming to market a year after the deadly terrorist attacks on New York and Washington, D.C. Some are carrying a selection of titles, including Tom Hannah of Video Quest in Joliet, Ill., who reasons, “I feel I should have the videos for those who want them.” Others, like Mick Blanken, disagree.“I am just not interested in perpetuating the horror,” says Blanken, the owner of SuperHitz Moviez and Gamez in Delaware, Ohio.

A small video rental company that edits and rents movies for “family viewing,” with swear words and sex scenes removed, files suit against the Directors Guild of America and 16 famous directors, including Steven Spielberg and Robert Redford. The suit asks the court to find the editing practices legal. Two weeks later, the DGA countersues, arguing video rental stores have no right to edit their films.

Several anime suppliers say they are phasing out VHS, opting to release their titles only on DVD. “Everyone wants DVD, period,” says Mike Egan of Manga Entertainment. DVD and anime appeal to the same demographics, and many anime fans have PlayStation 2 video game consoles, which play DVDs but not videocassettes.

Studio executives predict a record-breaking fourth quarter, with projections that total DVD and VHS sales could be up by as much as 15 percent from the fourth quarter of 2001. Execs cite strong demand for DVD and a slate of high-profile titles, including Spider-Man and Austin Powers in Goldmember, as key factors. Meanwhile, Video Store Magazine's latest consumer survey shows DVD households are more apt to collect movies than their VHS-only peers.

Mick Blanken resigns from VSDA board, claiming the organization no longer adequately represents independent video retailers. In a letter to members, Blanken says the association has become increasingly focused on larger chains and has taken little action on behalf of its indie core.

Rentrak Corp. announces a comprehensive video game revenue-sharing plan for its 6,000 independent retail accounts. The first title to be made available on a shared-revenue basis is the top-selling Blood Rayne from Majesco Sales.

Playboy Home Video celebrates its 20th birthday with a gala party in Las Vegas.

Both Wal-Mart and Blockbuster quietly enter the online DVD rental market, taking a cue from Netflix, the private online DVD renter that pioneered the concept in the late 1990s. Netflix, meanwhile, announces it has nearly 750,000 subscribers, significantly above its own forecast.

The East Coast Video Show returns to Atlantic City, N.J., and while VSDA president Bo Andersen says attendance is up, some retailers, as well as exhibitors, are unhappy with the turnout. “Good thing we came here with meetings, or we wouldn't have anything to do,” grumbled one independent video supplier, calling the show “a shadow of its former self.”

Monsters, Inc. becomes the top DVD seller of all time after just four weeks in stores, with sales to consumers of 9.2 million copies, according to Video Store Magazine market research estimates.

Blockbuster says it will launch a monthly DVD rental subscription service in its stores in early 2003. The DVD Freedom Pass lets customers rent as many videos as they want for $20 a month, with the stipulation that they have no more than three titles out at any one time.

Making good on a promise, Blockbuster reconfigures its stores to boost its sellthrough business. The new layout includes more sellthrough DVD units and side-by-side stocking of VHS and DVD new releases.

As retailers begin to phase out VHS, studios are beginning to blow out their inventories of catalog titles by quietly lowering wholesale prices to less than $5. As part of its Valentine's Day promotion, Fox reprices 10 romantic titles to $6.98, including such high-profile films as Hope Floats, French Kiss and Say Anything.

Columbia TriStar says it shipped 26 million units of Spider-Man into the market -- 20 million of them on DVD -- and sold through 11 million copies its first weekend in stores.

Industry veteran Rich Thorward, publisher of Movie Monitor, dies in his sleep at the age of 52.

The VSDA belatedly unveils its consumer show schedule, announcing three “Tinseltown Entertainment Expo” shows for spring 2003 in Norfolk, Va.; San Antonio; and Minneapolis. The association says if the first three shows go well, four more will be staged in the latter half of 2003, with plans for 12 events in 2004 and 16 in 2005.

Five studios officially launch Movielink.com, their much-ballyhooed Internet video-on-demand service, with about 175 downloadable films, including Harry Potter and the Sorcerer's Stone and Ocean's Eleven. CEO Jim Ramo calls it a “soft launch” and says that between now and the beginning of 2003, the five studios -- MGM, Paramount, Sony, Universal and Warner Bros. -- will test pricing, preferred aspect ratios, scalability and marketing approaches.

Holiday sales get off to a strong start, with DVD the hot ticket at specialists and mass merchants. Fierce competition among discount chains slashes first-week prices of hot new DVD releases to less than $15; DVD players sell for as little as $39 (at Best Buy). Studios step up “event marketing” for DVD releases and the national media takes notice of such stunts as troupe of camels walking down Sunset Boulevard in support of Universal's The Scorpion King, and Spider-Man making a web-slinging entrance at the United Nations building in New York City.

Warren Lieberfarb, president of Warner Home Video, is abruptly fired in late December. No official reason is given, but sources say it was the result of a power struggle between Lieberfarb and immediate boss, Warner Bros. chairman and CEO Barry Meyer.

The MPAA files suit against nine businesses that allegedly sold pirated DVD and VHS tapes on the Internet auction site eBay, seeking to shut them down.

Warner/Elektra/Atlantic Corp (WEA) announces it will shut down its headquarters in Burbank, Calif., this January and move to New York City to be closer to parent Warner Music Group. The move is part of a restructuring of the distributor, once a big player in home video, that will replace 10 branch offices with four regional offices.


1. After two years of effort, and three weeks of trial in San Antonio, a federal judge dismisses the antitrust case brought by indie retailers against Blockbuster and studios, saying the plaintiffs failed to make their case. Warner and MGM had earlier settled with retailers.

2. Warren Lieberfarb is fired from Warner Home Video just prior to Christmas, after 20 years at the company. Long considered the “father of DVD” for his leadership at Warner to push adoption of a single DVD standard, Lieberfarb is let go, insiders say, in a power struggle with Warner Bros. CEO Barry Meyer.

3. Blockbuster makes a big fourth-quarter move to expand its sellthrough business, revamp store layouts and offer guaranteed lowest prices on advertised product. Movie Gallery also moves to expand sellthrough, but Hollywood Video eschews the lower-margin business, says Hollywood's CEO Mark Wattles.

4. Kmart, one of the studios' biggest customers, files for Chapter 11 in January and struggles throughout the year, culminating in being delisted on the NYSE in December.

5. The video distribution business takes more hard blows in 2002 when Columbia TriStar announces plans to trim distributors to a favored few, though delaying it until the New Year, and Warner revamps its distribution plan, which excludes some secondary players.

6. Online rental business Netflix attracts entry by Wal-Mart and Blockbuster as it successfully issues an IPO and grows subscribers to more than 750,000.

7. Movielink VOD service finally executes a “soft” launch in November, supported by a consortium of five studios, offering a collection of 175 titles at $2.99 (catalog) to $4.99 (new releases).

8. USA Home Entertainment is dissolved in January and absorbed by Universal Studios Home Video.

9. Rentrak launches a revenue-sharing program for video games that lets home-video retailers expand video game sections in their stores.

10. The VSDA bows a new meeting-room format at its 21st annual convention, with moderate success, but then has to cut six staff members and institute other cost-cutting and revenue-generating measures, including a series of consumer shows in 2003, to stem dropping revenue from loss of membership and lower show revenue.


1. “DVD will be ubiquitous in this country.” -- Warren Lieberfarb, then president, Warner Home Video.

2. “I never asked it, nobody offered it to me and I never received it.” -- Viacom Inc. chairman Sumner Redstone about exclusive deals with studios.

3. “I don't think I can remember a year as tough as this one.” -- Pam Horovitz, NARM president on the audio business.

4. “Thank god for DVD, because it made up for all the slacking off that's happening in the music business.” -- Russ Solomon, founder of Tower Records.

5. “Bring it on.” -- Netflix VP Ted Sarandos on online rental competition from Wal-Mart and Blockbuster.

6. “I am concerned that the board of directors is nothing more than a rubber stamp.” -- Mick Blanken after his resignation from the VSDA board on his belief that the VSDA doesn't serve independents well.

7. “If we see DVD sales totally tank, then we would be in the Great Depression, because I would think that would be the last to go.” -- Ralph Tribbey, editor of the DVD Release Report.

8. “The DVD is where I can defend myself against the critics. I can scream back. I can explain what it took to make it. I can show you the places I think succeeded, the places I failed.” -- director Rob Cohen on Columbia TriStar's XXX DVD.

9. “I didn't want to have all these bells and whistles. I didn't want to have this blanket running commentary across the entire 11 hours. I just wanted it to be like a really dry martini. I wanted what we did afterward, the bells and whistles, to be the vermouth.” -- filmmaker Ken Burns on his Warner Home Video The Civil War release on DVD in September.

10. “I also get video people telling me: ‘Your movie is the one that gets stolen the most,' which I guess is also a compliment in a way.” -- director Kevin Smith on past conversations with video retailers.

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