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In the mid-'90s, with sales and profits sagging, Blockbuster underwent a series of management and strategy changes in hopes of breathing new life into the world's largest video-rental outfit. But it wasn't until 1997 that Blockbuster and its parent company, entertainment conglomerate Viacom, found a winning combination.
First, in mid-'97, Viacom installed former Taco Bell CEO John F. Antioco at Blockbuster's helm. Later that year, executives at Blockbuster and Viacom hit on a strategic solution in the form of so-called revenue-sharing deals with Hollywood film studios.
Under the agreements, Blockbuster pays the studios a discounted price for videotapes and in return shares its rental revenue with them. The lower up-front price allows Blockbuster to obtain enough copies of hot movies to satisfy customer demand. The revenue-sharing deals have played a key role in helping to turn around the Dallas-based chain's fortunes.
COURT CHALLENGE. Those deals are at the heart of lawsuits filed by independent video-rental store owners in Texas and California. On June 12, the Texas trial began in U.S. District Court in San Antonio. Three owners of small video stores allege that Blockbuster, Viacom, and several of the major film studios conspired to drive them out of business, and that the studios violated antitrust laws by discriminating in favor of Blockbuster on the terms for sale of videotapes.
A similar case, brought by about 250 independents, is pending in California. No trial date has been set. Analysts have said a loss in Texas could open the door for more litigation against Blockbuster from independent retailers nationwide.
On the morning of June 17, BusinessWeek Correspondent Stephanie Anderson Forest talked with Chairman and CEO Antioco before he headed into court on the fourth day of the trial. He was upbeat and confident as he spoke about the allegations in the lawsuit, Blockbuster's defense, and implications for the company if it loses this case. Edited excerpts from their conversation follow:
Q: When are you scheduled to testify?
A: I'm either going to be the last witness called for the plaintiffs, or the first witness called for the defense. [U.S. District Court Judge Edward C. Prado, has set aside six weeks for the trial.]
Q: So, you have to be here every day until you're called?
A: I don't have to. I want to be here.... We want to win, and we would like to end it here. I end each session with the same question: Why are we here?
I'm totally flabbergasted. There's not a single shred of evidence that says Blockbuster tried to influence the studios in their overall decisions. [Besides], these [studios] are more competitive than collaborative. They can't agree on anything.
And, there were no exclusive deals [with the studios], no "favored-nation status" [i.e., that under the revenue-sharing deals Blockbuster would receive better terms than other retailers].
Q: How is the trial going so far?
A: I think it's going pretty well [in favor of Blockbuster]. We continue to believe there are no facts to support what the plaintiffs are alleging. That's why we didn't settle. [Two studios originally named in the Texas suit, Warner Brothers and MGM, settled with the plaintiffs last month for an undisclosed amount.]
There are two facts that the plaintiffs keep putting forth. One is that since the revenue-sharing agreements, Blockbuster's market share has increased and independents' share has decreased. But [Blockbuster's market-share gains over independents] is nothing new.... That's consistent with every other retail industry. Chain stores in America have grown and grown as independent contractors have contracted.
Q: Is the 40% market share the plaintiffs allege Blockbuster has today, up from 25% before the revenue-sharing deals, accurate?
A: It's more like 38% now.
Q: What's the second point plaintiffs are pushing?
A: That the studios gave us better deals than [they gave others]. [Each deal was negotiated with studios on an individual basis.] I'm not sure that we got better deals, because we had to commit to several burdensome terms. For example, we had to take the total output of everything [the studios] made [whether the release was a hit or a dog], and we had to offer them minimum guarantees of profit [on each title, regardless of the rental revenue a particular title generated].
But even if they were [better deals], so what? We negotiate the best possible deal for Blockbuster. It's not up to us to negotiate for the entire industry.
Q: You sound pretty confident that Blockbuster will be vindicated in this lawsuit, but what if it loses? What are the implications?
A: We believe the financial implications are at most about $2 million.
Q: What about in terms of the business model?
A: Not much, because by the end of the year only 25% of our business will be based on revenue-sharing deals.... Revenue-sharing isn't what it was in 1997.
Q: Revenue-sharing now accounts for what percentage of your business, and why will it drop to 25% by yearend?
A: It's about 40% of our business. The advent of DVD [digital videodisks] is responsible for the shift. [Over the past year, Blockbuster has moved aggressively into pushing the higher-margin -- and thus more profitable -- DVD format.]
Q: Might we see revenue-sharing DVD deals sometime soon?
A: Revenue-sharing on DVDs maybe would be a way to marginally improve the business for both parties.... We might do it, but it's not necessary.
Q: So, VHS revenue-sharing is far more beneficial than DVD revenue-sharing?
A: Yes. And not only for Blockbuster and other video rental stores. Video-rental consumers today are better off than they were five years ago. Today, you can walk into any [video-rental] store and get any video you want when you want it, because of the plethora of revenue-sharing deals [that allow all stores that make them to offer a more in-depth selection of videocassettes].
All our major competitors secured revenue-sharing deals within weeks of ours. These [plaintiffs in the Texas lawsuit] decided not to avail themselves of revenue-sharing.
Q: Do you think that with this lawsuit and the one in California, Blockbuster is being punished or targeted for its success?
A: I don't think they would be suing us if they didn't think we were big, with deep pockets.