Blockbuster may have forced the issue of shared revenue and increased copy depth on the video industry, but roundtable participants were not very excited about the studio programs available to them.
da Vanover, video coordinator/merchandiser; K-VA-T Food Stores, Grundy, Va.
Many said they were addressing the copy depth programs on a case- by-case and title-by-title basis. But Kirk Mueldener, director of video operations, Hy-Vee Food Stores, West Des Moines, Iowa, said the only thing keeping him from expanding with shared revenue was uncertainty over how the new distributor programs were going to take shape. "But shared revenue looks very promising," he said.
Strong opinions flowed freely when this topic was brought up. Here's what the retailers had to say about revenue sharing and the other copy depth programs:
SN: It seems like Blockbuster is forcing the issue of shared revenue on the video industry. What do you think of it now?
MUELDENER: My slant on the whole thing is that Blockbuster's revenues were dropping and they realized that they either needed to increase their sales or lower their costs. When they first went to the studios a couple of years ago to try to get the costs of the product lowered, the studios told them no. That's when Blockbuster started to look at revenue sharing to lower their up front costs. When they jumped on that, it looked like a good idea. But I think revenue sharing took off, not because Sumner Redstone changed the face of the industry, he just has navigated himself to the lowest up front cost out there.
SN: Where do you stand with shared revenue right now?
MUELDENER: We are still in a test situation and stalled on either expanding or contracting it until we can figure out what's going to happen with the distributor programs. So far, it has gone fairly well. But now we are in the midst of spring and that's never a good time. But shared revenue looks very promising.
VANOVER: I think it is a short-term fix to Blockbuster's problem. I really believe that it will cause more problems for other retailers. It puts too much product out there, and the titles die off too fast. Overall, I just think that it will hurt the industry. I don't feel a competitive need to get into it because of Blockbuster.
We tested SuperComm and it went well for the first few months. But it really hurt our profit at the end of the term. We just found that we were making less profit with it.
SCHLOSS: We've gone back and forth, and looked at shared revenue a few times. We are sitting on the fence right now. I really haven't made a decision which way to go. On a shared revenue program, you have less money tied up, naturally, but on the other hand it cuts into your profit margin too -- quite a bit. But it's something we may have to look at down the road. If movie costs keep escalating, we may have to go to a shared revenue program or something like that. But looking at it another way, DVD may turn the business around because the cost of DVD is a lot less than for VHS movies.
UFER: Blockbuster is trying to gain market control in the video industry. Then after they have gained the market share they feel they deserve, they will try to readjust some of the relationships with the studios. My opinion has always been against shared revenue. The big winner is customers and that's a good point. But from a retailer standpoint, all you do is shorten the legs on the videos that you buy through shared revenue and you end up having to give away half of your money.
REDISKE: The move to revenue sharing is not a positive thing. It doesn't add anything to the industry or potentially solve any of the problems we face. I consider it something of a shell game, I guess.
From the studio side, a lot of it hearkens back to the early '80s when the studios tried a system where they owned the tapes and the retailers rented or leased them. The studios seemed anxious to retain their theatrical system of control and sharing in the revenues. But what they found at that time was that the paper trail and the costs of doing it were prohibitive and evolved to our current system. Now they are moving back to that and I think they are going to run into the same problems that they had then. Already there are problems with defects and so forth.
But we make limited use of both SuperComm and Rentrak. We have a few stores who purchase that way. We have been using Rentrak for four or five years. About half the accounts are happy with it and half of the accounts are ambivalent. Half of them we use it pretty extensively, the other half we use it only on the top two or three titles per month.
With Rentrak there's the difficulty of managing the program at store level, especially in a grocery environment. Each title has its own set of rules as to when you can get rid of it, for example. It becomes a problem for the stores. With both programs, there is the problem of decreased profitability. You are going from 65% to 70% gross profit down to less than 50% and have to look at how that impacts overall return. That is an issue we are wrestling with right now.
SN: Does retailers' happiness with revenue sharing correspond to the extent that they use it?
REDISKE: That is absolutely true. It's been beneficial to the stores that have been very aggressive in using the programs. For these programs to work properly, you need to incorporate the buying strategy in with the promotional strategy. If you do guaranteed or advertised availability of a title, I think it can have a real strong image impact on your store and it will compensate for the impact that it has on gross profits. But as a buying strategy alone, I don't think it makes sense in the long term. For either Rentrak or SuperComm to be beneficial, they need to be strongly incorporated with the marketing and advertising of the department.
SN: Are you running guaranteed availability programs on rental movies through shared revenue or on sell-through priced titles? Do you feel that you have to because of Blockbuster and Hollywood?
REDISKE: We need to do what Blockbuster and Hollywood are not doing. We have to be aware of what they are doing, but offer different products and services. If you move your grocery store across the street from Safeway, you don't try to mirror what Safeway does. If you are going to compete effectively, you do what Safeway is not doing. Otherwise, they will beat you down. If you try to match Hollywood and Blockbuster blow for blow, you are going to lose.
MUELDENER: We don't have to do guaranteed availability because of competition. One thing we have over Blockbuster and Hollywood is customer count. My goal is to take advantage of that customer count to rent out whatever amount of copies we put out, and to maximize that.
VANOVER: We don't run guaranteed availability programs. Our space is so limited. If you brought in 100 to 200 copies of one title, you're going to run out of space. So one of those programs would be really hard to do. And again, we are not feeling any competitive pressure to do it. There is just so much product out there. We've tried the revenue sharing, and it just didn't work for us. I don't want to go backwards, I want to go forwards.
SCHLOSS: We tried guaranteed availability a few times with different hot titles and brought in an average of 60 to 75 copies per store. We ran ads, "Guaranteed availability, if you can't find this particular movie in our stores when you want it, your next video rental will be free," or promoted them at half price. The results were okay. It wasn't a major, blockbuster promotion for us. We didn't go after it full bore. The fact is that when you bring in a lot of copies, and guarantee that you are going to have them, it cuts into your profit margin. The success of a video department lies in how many times you can turn a video. If you have a video sitting on the shelf, you sure aren't generating revenue dollars for it.
UFER: I worked guaranteed availability on sell-through titles, such as "Mouse Hunt" or "Air Force One," where I brought in 10 times more than normal. I guarantee that it is available, and then after a certain period, which is usually 30 days, I start selling them off as previously viewed. This worked very well because I was able to get studio support and advertising. So it does become a marketing tool and people come to our stores specifically because they know that it's guaranteed to be available. It helped drive traffic and it was a way for me to compete against the Blockbusters and Hollywoods.
SN: Is there a point of diminishing returns with shared revenue programs?
MUELDENER: There is a point of diminishing returns. Obviously, you can't support an entire market with a title, cover your initial cost and then make some sort of return on investment. There are still limited rental dollars out there. A major grocery store still draws on probably a five-mile radius, depending on your location in the metro area. There can only be X number of rental customers out there. There has got to be a saturation point between your own customers in the store and just how many copies are necessary for an area overall.
VANOVER: Yes. I truly believe there is a point of diminishing returns with these programs. That's the way it worked for us.
REDISKE: There is a point of diminishing returns, particularly as it relates to B titles. Those are the titles that you need to make money on over the long haul and what you do is limit the amount of money you can make on them by bringing them in through revenue sharing.
SCHLOSS: Yeah, there is. You can over-saturate the market and over-inventory yourself by bringing in just too many titles for the first three weeks. But after the first three weeks before the movie's even paid for itself, if you have saturated the market too quickly, you're going to have a lot of videos sitting on the shelf doing nothing. You're going to end up either doing a return program or closing them out.
SN: How have you responded to the studio copy depth programs that offer free product if you meet certain purchasing requirements?
MUELDENER: The free product programs are a failure. They are self motivated by the studios to attain the numbers they project. They were never designed to help retailers. There are too many hurdles and jumps. If you look through it all, we're just there to make sure they get the numbers they need.
Currently, we aren't going to participate or even review them with any of the studios. If we happen to qualify just by making the right buy, then great. But we're not going to adjust our buys to participate in those programs.
Number one, they weren't effective. Number two, the goals were outrageous. In a recent period, if we had chosen to meet their goals and participate in all three studios' programs, we would have only had 14% of our open-to-buy dollars left over for the rest of the studios. It was at that point we realized that under these programs all the studios are doing is going out and finding comparable titles to meet the national goals that they set. It really doesn't matter what they use as a comparative title. They just sit around in a room and figure out which ones are going to match up to their needs.
UFER: I've been able to take advantage of several copy depth programs. Although I have appreciated the product, it's not the best thing for the industry because it is preferential to the larger chains. The larger chains have more cash available to them and more assets available to buy into these programs. The small operator has a really hard time competing because of these programs.
While I've been able to take advantage of some of them, I haven't been able to take advantage of all of them.
VANOVER: Most of the copy depth programs are just way too complicated and some of them are more trouble than they are actually worth. You have to spend so much more to actually get the free product. If we used all of them and if we stayed within our budget, then it would affect the purchases of other titles. We wouldn't have such a wide variety.
For now, I just go program by program and title by title. I look at each one and see if it is going to benefit us. Is it going to cause me to go over budget? Is it going to prevent us from getting the five other titles that our customers are asking for?.
REDISKE: When they are used in conjunction with promotion, they have a lot more impact. For instance on the first Warner program, we used their watch premium in conjunction with the copy depth program and that had a good effect on all stores. It generated some excitement and we had the titles to back it up.
We look at the programs individually and we use some more than others. It's case by case. Some are prohibitive in terms of the number of copies you have to bring in.
The biggest obstacle right now, and my biggest gripe, is the defect policies for all except Columbia. I have some stores that are saying, "no more programs." They will not participate because the defect restrictions gripe them so much.
Another program I recently heard about is even weirder. With that one every single return needs to go directly to the studio, which I think is incredibly stupid. If that goes into effect, I know I will buy far less of the main title than I would normally buy, because accounts will not stand for it. They don't want a delay in getting their product back.
SN: How would you like to see these programs change, or would you rather see them go away?
MUELDENER: I would like to see volume pricing or lot pricing. Buy five, get one free, buy 10 get two free, buy 15 get three free, something like that. With that approach, we would be able to sit down and calculate if I brought in 10 copies of a title, my average unit cost will be this. If I feel confident about it, and want to stretch it up to the next lot pricing level, then my unit cost drops down.
VANOVER: I would like them to just forget those kinds of programs and lower the prices.
UFER: I would prefer to see a tiered pricing scale rather than these free goods programs. This would be based on how many stores you have, and how many copies per store you would buy, in determining the price you would pay for a video. But mostly, I'd just like to see lower prices.
REDISKE: Defects is by far the biggest problem I have with the programs. Otherwise, the way I look at it, nobody is putting a gun to your head and forcing you to use these programs. So present me with the program, and if it makes sense, we will do it.
