TK's MORNING BUZZ: Warner's Crackdown on Sideways Selling May Come Back to Haunt Them

1 Sep, 2000 By: Thomas K. Arnold

Today is the first day of Warner Home Video's controversial new Rental Direct program, and from what we hear, things went off without a hitch.

Retailers--at least, those who sent in their credit applications in a timely fashion--got their product in plenty of time for today's unusual Friday street date.

Warner also appears to be making good on its threat to crack down on sideways selling. That's their perogative--on the surface, it defeats the purpose behind copy depth--but if they continue to take a hard line against offenders, my guess is it that it may come back to haunt them.

Sideways selling, of course, is the practice in which one retailer meets goal and makes his buy, keeps only what he feels he needs, and then turns around and sells off the surplus goods to other retailers.

This helps retailers effectively lower their cost of goods even more than under the most generous studio-sanctioned copy-depth program. But it also cuts into studio revenues.

Nearly three years into the copy-depth area, sideways selling is running rampant. At last April's National Association of Video Distributors (NAVD) meeting in Indian Wells, Calif., distributors estimated as many as 80% of their retail clients engage in some form of sideways selling.

It's always been a thorn in the studios' sides, but there's never been an effective way to police it. But with Warner now in the driver's seat, selling its rental titles directly to retailers, the studio is in a far better position to closely monitor sales and punish retailers who aren't playing by the rules.

This could be a double-edged sword. For Warner's Rental Direct to succeed, the studio needs to sell as much product as it can to as many retailers as it can find. Many retailers insist that if it wasn't for sideways selling, they couldn't survive. Once word gets out about Warner's crackdown, some retailers might simply stop buying Warner product, partly because they can't afford to and partly to send a message to the other studios to please continue looking the other way.

Should that happen, Warner will have to do some serious number-crunching and figure out if it's costing the studio more, in lost sales, than it would if sideways selling were allowed to proceed.

In the end, it might just come down to profits versus principle.

What do you think? Will Warner's hard line against sideways selling come back to haunt them in the pocket book? Click on FORUMS and give us your opinion.