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Hollywood studios have always had a love-hate relationship with Blockbuster. That familiar blue-and-yellow logo on some 5,000 stores around the country means big money for the movie moguls. Last year alone, according to Wall Street's Schroeder & Co., studios collected more than $14 billion from videocassette sales and rentals. That figure represented 45% of their revenues, making it their largest single cash source.
Still, the film crowd shed few tears when the Dallas-based video-rental chain announced on Mar. 9 that it was backing out of its eight-month-old agreement with energy-distribution company Enron Corp. to offer "video-on-demand" via the Internet and set-top boxes. At the time it pulled the plug on this pact, Blockbuster had deals with two major Hollywood studios -- Universal and MGM -- to stream or offer downloadable movies over the Internet.
Blockbuster was getting out, it said in a statement, because it felt that its exclusive deal with Enron, which owns superfast fiber-optic lines, was too limiting. "We believe there will be multiple technologies that will make this service available in the home," Blockbuster Chairman John Antioco explained in announcing that the exclusive tie-up with Enron was off.
PAYBACK TIME. But before Blockbuster's display of generosity toward the satellite and cable operators of the world (after all, they would have been left out) fills you with a warm and fuzzy glow, consider this: The real reason Blockbuster backed out was because it was stiffed by Hollywood's honchos, the same guys who rely on the video giant and its ilk to help pay Bruce Willis' stratospheric salary.
Make no mistake: Plenty of bad blood flows in Hollywood between the studios and Blockbuster. After enduring the suffering inflicted by Blockbuster's onerous deals, many film execs would dearly love to see the company take its lumps. "We didn't like their business model. We didn't like their terms," says one top studio executive, who adds: "We basically didn't like them."
What does this say about the future of Blockbuster, which is 82%-owned by Sumner Redstone's Viacom (which also happens to be the parent company of Paramount Pictures)? Blockbuster, which has been in turnaround mode for a little over a year now, is doing fine these days. But about the only thing keeping the studios tethered to it is that they, too, haven't quite figured out what they want to do with the Internet and whether folks are one day going to trust cable and satellite companies to deliver the same kind of product Blockbuster now supplies. Frankly, if the studios could figure out another way to get their films into your home, they would dump Blockbuster faster than you can plop a Freddie Prinze Jr. cassette in a 24-hour return slot.
TWO FACTIONS. You see, while Blockbuster was scurrying around to sell moguls on its planned Internet service, the studios were trying to figure out how to offer the same thing. Now two factions exist: one backed by the Walt Disney Co., the other supported by Sony Pictures. The former intends to revamp its own movies.com site from an informational outlet to one that can deliver films on demand. The latter is offering up a rival site, to be called Moviefly.com. Word has it that Fox has already allied itself with Disney and that Sony has lined up Warner Bros., and may be close to bringing Universal aboard as well. Both Sony and Disney hope to start shipping movies over the Internet as soon as this summer.
"In the very near future, anyone with a broadband connection will have the option of paying, say, $3 to rent a movie directly through movies.com rather than driving to a video store," predicts Disney Chairman Michael Eisner. Peter Murphy, who heads Disney's strategic-planning operation, puts it even more directly: "We intend to be Blockbuster."
Why do studios yearn to supplant Blockbuster? Well, in addition to the bad blood, there are bottom-line reasons. As Murphy explains it, every time a studio makes a film, it has to share the picture's revenue stream with exhibitors and video stores. There are also valuable intangibles, namely the relationship rental stores have with the people who rent the movies. "We want to have that relationship," says Murphy. "We want to know their name and what they like to watch. If you like Ben Affleck, we want to tell you we have another Ben Affleck film coming out. If you like action films, we want to tell you about an action film you might not have already seen."
HIDDEN HIT. Sounds perfectly logical, especially with the lingering hard feelings. In the mid '90s, Blockbuster tried to change the way it did business with the studios. After years of simply buying outrageously marked-up videocassettes and then renting them out, Blockbuster was fast going broke. So it told studios it would buy more cassettes -- albeit at dirt-cheap prices -- and then share the rental revenue with the studios.
And if studios didn't agree? Just take a look at what happened to Dreamworks: Last year, when it refused to share revenues with Blockbuster on its Academy Award-winning American Beauty, the studio found that its hot movie was stuck behind the counter at Blockbusters, away from those New Release aisles where the crowds congregate.
Hollywood's ambitious plan to siphon off even some of Blockbuster's business has more than a few problems, however. For starters, it takes more than 30 minutes to download a film over even the fastest Internet connection. Never mind that it will be four or five more years before even half the country has access to superfast broadband. Even then, how much of a market will there be for watching movies on a PC screen while sitting ramrod-straight in an hard-back office chair? Oh, yes, and the picture on the screen is a four-inch square.
REMEMBER BETAMAX. There's also a great deal of concern among Hollywood studios about being "Napsterized." While the record companies snoozed, Napster turned on millions of folks to the wonders of getting music online for free by sharing it with each other. Courts have ruled that Napster and similar sites can't make music -- or films, for that matter -- available via the Net for free. But a cautious Hollywood wants to plant its Internet film flag in the ground before a Napster-style company gets there first.
The studios remember, and none too fondly, how they fought Sony all the way to the U.S. Supreme Court in the early '80s to foil Sony-made videocassette recorders that taped movies and TV shows. Sony eventually triumphed with a 1984 decision that allowed folks at home to record whatever was being shown on their TV screens. And while that decision dealt only with the recording and "time-shifting" of movies and TV shows by the consumer, the studios pretty much lost out on the opportunity to become primary players in the video craze as other outfits began setting up tape-rental stores around the country. The studios swear they ain't gonna let that happen this time.
The next few months will be telling. The studios clearly want to carve out a place for themselves in the world of digital downloads and video-streaming -- even though none is exactly sure when it will all come to pass. Same for Blockbuster, which has a deal with DirecTV to sell satellite dishes in return for a cut of DirecTV's pay-per-view revenue.
EXTENSIONS. Blockbuster also intends to ink agreements with what it calls "content providers" -- studios, that is. And it's going to do this with a very big stick: Namely, if a studio wants Blockbuster to carry its videos and DVDs, it will have to let Blockbuster in on distributing its flicks over the Internet as well. The deals Blockbuster signed with MGM and Universal, in fact, were extensions of their expiring agreement for videocassettes and DVDs, says Karen Raskopf, a spokeswoman for the video chain. "We want to distribute their content in every place a consumer might want to get it," she says.
Sound like hardball? It does to me. Still, Blockbuster has a lot going for it. It has stores on just about every Main Street and shopping center across the country, and it has a world-class brand name. The chain also knows more about costumer service, pricing, and all kinds of things about marketing those videos than the studios can begin to comprehend.
So where does that leave Hollywood studios? Well, they need video revenues, and that means that for now they need Blockbuster. The studios know that delivering movies over the Internet won't happen overnight, and they probably have figured out that any site they create will have to compete with Blockbuster stores, as well as with video-on-demand from satellites, and who knows where else. That means, says Joel Karp, a researcher with Webnoize, an Internet consultantcy in Cambridge, Mass., that the studios had better work with everybody -- such as DSL providers, satellite companies, and, yes, even Blockbuster, to get their movies out. Studios acknowledge as much.
STICK IT TO TINSELTOWN. And so that love-hate relationship is likely to continue. While not going ahead with a full-blown deal, Blockbuster will soon complete a test of its Enron-backed service in places like Seattle and American Fork, Utah. And as its contracts with studios continue to come up for renewal, the video chain will persist in sticking it to Hollywood -- insisting that it get Internet and video-on-demand distribution if the video money tree is to remain in bloom.
All that blood and gore isn't just up on the screen -- or on your TV set or computer. Sometimes, you see, the biggest fight scenes happen before the movie is even filmed.
Grover is Los Angeles bureau chief for BusinessWeek. Follow his weekly Power Lunch column, only on BW Online Edited by Patricia O'Connell
Copyright 2001 , by The McGraw-Hill Companies Inc. All rights reserved.
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