COPY DEPTH IS KEY TO GROWING VIDEO RENTAL

DAN ALAIMO

LAS VEGAS -- The video trade, to compete with new in-home delivery methods and to renew interest in rentals, must improve customer satisfaction through greater copy depth, according to leading industry officials who spoke during the main business session at the Video Software Dealers Association's convention here.

So far, new buying initiatives, accompanied by increases in advertising and promotion, are working, said Jeffrey P. Eves, president of the Encino, Calif.-based VSDA. Total video-rental revenues are up 5.9% for the first six months of 1998 compared with the same period in 1997. If this trend continues, the industry could close the year up 10%, recovering all the ground it lost during 1997, he said.

"Although some seem to forget it from time to time, our biggest adversary is outside this convention center and away from this place. You'll find his cables under the ground or his satellites a hundred miles in the sky -- or perhaps you'll find him down the street at your local Circuit City store," Eves said in reference to the new Divx limited-play DVD format.

"Let us not become blind-sided by internal conflicts to the extent that we ignore our biggest external competitors and our passion for satisfying the consumer," he said as a group of dissident retailers met during the conference last month to question whether the studios are giving preferential pricing to Blockbuster.

Eves set a target growth rate for the industry of $1 billion -- or 300 million new rental transactions -- over the next three years.

John Antioco, chairman and chief executive officer of Blockbuster Entertainment, Dallas, said the chain was forced to take drastic action following a two-year erosion of rental transactions, membership base and profits. When Antioco joined the company a year ago, "everything was broken. Blockbuster had taken its eyes off its customers and its core business," he said.

"Blockbuster had simply failed to respond to the competition. But our customers had responded -- by leaving in record numbers."

Since implementing new marketing strategies, rental transactions are up 10%, and profits are improving. "But because of massive reinvestments we're making in our business, they will not be commensurate with revenue growth until later this year," he said.

The key to revenue growth has been increased advertising, supported by increased copy depth, which, in turn, was facilitated by revenue sharing, Antioco said. "For Blockbuster, revenue sharing is simply a means to an end. It's one way to better satisfy customer demand.

"Revenue sharing gives the studios a greater stake in our industry," he continued. "It encourages them to see us with new eyes, to see us, once again, as a growth channel, and to promote us, for example, by marketing their titles after street date, with longer windows and by truly supporting open DVD." ["Open DVD" refers to the standard DVD format, as opposed to the closed or limited-play Divx version.]

This strategy has been good for the overall video industry, Antioco said. "Our research shows that when Blockbuster advertises and promotes video rental, the industry grows," he said.

Antioco downplayed news about Blockbuster's plans to increase market share, attributed in past press reports to Sumner Redstone, chairman of Blockbuster parent Viacom, New York. "Our only goals are to increase our sales and profits, and that will be easier, more sustainable and more palatable to our studio partners if we're growing our respective businesses inside a growing industry," Antioco said. He endorsed Eves's plan to expand industry revenues by $1 billion.

But the video industry has to keep its eye on both new technological competitors and customer satisfaction. "Although the industry today represents more than 50% of the studios' domestic revenue, we have to recognize that if they can find a more profitable vehicle for delivering their product, they'll do it," said Antioco.

"We can remain the most profitable channel by remaining the consumer's preferred way to watch movies at home. We must let our customers guide us. They're telling us what they want: product, convenience, value, control, service."

Blockbuster, he added, may answer those demands in one way, while competitors go in other directions. "But as long as we're answering -- both separately as better competitors and together as a better trade association -- consumers won't feel the need to turn elsewhere for home entertainment. And we, together, will be able not only to preserve our industry, but see it thrive and grow."