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HIVE EXCLUSIVE: Antioco vs. Lieberfarb

20 Apr, 2001 By: Thomas K. Arnold

Warren Lieberfarb calls Blockbuster “an endangered species.”

John Antioco says Lieberfarb is “out to lunch.”

And with these and other choice phrases, two of the home video industry’s most powerful leaders have taken what one observer callstheir “philosophical difference on business models” to the august pagesof the New York Times, squaring off over the future of DVD.

Lieberfarb, president of Warner Home Video, has always seen DVD as a sellthrough product. He believes that, eventually, the existing homevideo consumer base will be split into two, with buyers building disc libraries and renters migrating to video-on-demand over cable and theWeb.

Antioco, chairman of Blockbuster Inc., is just as zealous in his belief that a pay-per-transaction market will continue to flourish, despite the current flatness in VHS rentals. He sees DVD rentals as more than makingup for any decline on the VHS side, and has floated the idea of the studios establishing some sort of rental window for DVD.

In a Times story that ran April 16, Lieberfarb predicted that as morepeople buy DVDs, disc prices will continue to fall, which will entice even more people to buy rather than rent.

Antioco, however, insisted in the Times piece that “DVD sales will never replace rentals.”

Don’t expect a meeting of the minds. Adams Media Research numbers cited by the Times show the studios kept only 26 cents out of every dollar consumers spent last year on renting videos, compared to 75 cents out of every dollar spent on purchasing a video. Granted, this gap might be inflated because the rental number includes existing inventories,long bought and paid for, but most observers believe studios keep a larger share of the proceeds from purchases and retailers from rentals.

Lieberfarb commented for this story: “John and I have different points of view as to the future home entertainment landscape. In one respect we share a common view: the prolongation of the VHS rental model. However,our industry is characterized by technological innovations that enhance the consumer experience and provide greater convenience. DVD, massdistributed at affordable price points, and VOD, with true VCR functionality are inevitable.”

Antioco comments: “Warren’s stated view for the future of home entertainment consists entirely of retail [sellthrough] packaged mediaand electronic delivery. Obviously, Blockbuster has a very different view of the future. And to quote from my favorite movie, "this isbusiness, not personal.” Blockbuster spokesperson Karen Raskopf says Antioco is committed to DVD rental not just for financial reasons, but because he thinks it’s “what the consumer wants.”

It’s worth noting that Lieberfarb has never been a fan of rental. In the early days of home video, he was an outspoken critic of the videorental model, and until the First Sale Doctrine cemented the right to rent he went after a piece of the pie with one of the industry’s firstcassette-leasing programs.

Lieberfarb also is considered the “father” of DVD for his pioneering attempts to get the format launched, and early on urged retailers topush DVD sales rather than rentals as the most effective hedge against electronic delivery. Even then, it was no secret that Time Warner, with its expansive cable holdings, was bent on developing a viable VODservice.

Antioco, meanwhile, is a turnaround specialist who joined Blockbuster in 1997 with the mandate to put the then-ailing chain back on its feet by refocusing on its core strength, video rental.

But there’s more than money and corporate philosophies driving the wedge between Lieberfarb and Antioco. The two men first met in thesummer of 1997, when Antioco and his new boss, Viacom chairman Sumner Redstone, held a series of meetings with studio executives aboutBlockbuster’s sagging fortunes.

The Blockbuster pair’s pitch was this: Consumers had grown tired of the rental experience and needed something to re-energize them, like always finding the movies they wanted. Studios responded by offering morecopies to Blockbuster and other large, direct accounts through revenue-sharing.

Meanwhile, Lieberfarb and his team led the DVD push. Parent Time Warner holds 11 DVD patents, and Lieberfarb had taken a personal interest. “Itwas, and still is, his child,” notes one observer.

Blockbuster, however, was slow to get into DVD, much to Lieberfarb’s chagrin. He urged Antioco to step up to the plate, but all he got was a 115-store “test.” In April 1998, Antioco announced plans to begin renting DVD in more than 1,000 Blockbuster outlets, with PhilipsElectronics placing players in stores in a deal brokered by Warner. But such a rollout never materialized when Blockbuster made it clear that it wanted hardware companies and studios to absorb most of the initialexpenses.

Blockbuster did expand its DVD presence by the fourth quarter, but only to 500 stores. The chain also did not participate in a major national fourth-quarter promotion with Warner and hardware companies, which ended up partnering with Hollywood Entertainment Corp.

Lieberfarb’s anger grew when reports surfaced that Blockbuster was negotiating to buy Divx, the pay-per-play DVD variant bitterly opposedby Lieberfarb and other backers of so-called “free” DVD.

Sources say that in early 1999, there were a series of meetings between Warner and Blockbuster. Each side brought something to the table: Warner, a renewal of its revenue-sharing deal; Blockbuster, itsincreasing market share.

In July 1999, Viacom’s Sumner Redstone told analysts Blockbuster was now on track to aggressively promote DVD in all its stores. Heattributed his change of heart to an agreement by DVD hardware and software suppliers to provide the chain with free goods. He didn’t name any names. At the time, observers noted that Blockbuster’s decision toembrace DVD came on the heels of Divx going bust.

Lieberfarb’s next order of business was to get Blockbuster to share revenue on DVD rentals, as it was doing on VHS rentals. But he met with no success.

Then, last fall, Blockbuster began a campaign for DVD rental.

Blockbuster executives last January met with the VSDA board and several studio heads, armed with statistics they claim show studios are leaving money on the table by not pricing DVD for the rental market first.Blockbuster even erected billboards in Los Angeles, Hollywood’s backyard, promoting DVD rental with the line, “Rental is better.”

Lieberfarb’s response has been to step up his rhetoric supporting sellthrough. “Warren knows what he wants, what he believes in,” notes one observer. “And he doesn’t like it when people stand in his way.”

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