Dramatizing a rapid shift in consumer electronics, Blockbuster Inc. announced Monday that its stores will dump one-fourth of their VHS tapes to make room for more profitable digital videodiscs.
Blockbuster will take a $450-million charge against earnings to cover the inventory overhaul.
The announcement was the latest in a series of moves and countermoves by Hollywood studios, which rely heavily on video rental revenue, and Blockbuster, the dominant source of those rentals.
Unlike videotapes, Blockbuster does not share revenue with the studios on most DVDs, said John Antioco, the company's chairman and chief executive. Instead, it typically buys copies of the DVDs at wholesale prices and keeps all of the rental fees.
The popularity of DVD players, which offer clearer pictures and better sound quality than VHS players, has skyrocketed in the last three years. Shipments of DVD players rose 70% in the first half of the year. And the 20.4 million units shipped puts them in about 20% of U.S. homes, according to the DVD Entertainment Group and Statistical Research Inc.
The studios recently tried to increase their leverage over Blockbuster by announcing two new ventures to distribute movies through the Internet and cable video-on-demand systems. Those ventures threaten to cut Blockbuster and other middlemen out of the pipeline between the studios and consumers.
In the meantime, Blockbuster is negotiating new contracts for VHS tapes with several Hollywood studios. Under those contracts, Blockbuster shares its VHS rental revenue with the studios in exchange for lower prices per copy and earlier access to titles.
Blockbuster plans to unload about 25% of the VHS tapes in each store, Antioco said, by eliminating movie titles no one had rented in the last year. Those titles, which will be removed by Thanksgiving, represent less than 2% of Blockbuster's revenue.
People who own DVD players also tend to rent movies more often than those who don't, said Karen Raskopf, a Blockbuster spokeswoman. About 20% of Blockbuster's rentals are DVDs today, but that share is expected to double next year, Antioco said.
The growing popularity of DVDs makes the studios yearn for the same kind of revenue-sharing deals they have with Blockbuster on VHS tapes, said entertainment analyst Jeffrey Logsdon of the Gerard Klauer Mattison investment bank.
"The studios loved revenue sharing [for VHS because] they went from taking about 30 cents of every rental dollar to taking something closer to 45 cents," Logsdon said. "With DVD, they're back in the ballpark of taking about 30 cents of every rental dollar."
And those dollars are substantial. About half of the money spent on filmed entertainment in the U.S. goes to video rentals and sales, according to PricewaterhouseCoopers.
It was Blockbuster and Antioco who sold the studios on the idea of revenue sharing in 1997--a move that helped revive Blockbuster and propelled the entire rental business to new heights. The switch dramatically cut the price Blockbuster paid the studios for popular new releases, enabling the company to buy more copies and make more rentals.
With DVDs, Blockbuster is paying a relatively low price--about $15 per copy, compared to $65 or $75 for VHS tapes prior to revenue sharing. So Blockbuster, which can afford to stock multiple copies of DVDs, doesn't face the kind of shortages in discs that prompted the revenue-sharing deals for VHS tapes, Antioco said.
Nevertheless, Antioco said Blockbuster would be more inclined to strike revenue-sharing deals for DVDs if the studios raised prices sharply for DVDs. Such a move, however, would probably damage the burgeoning retail market for the discs.
Blockbuster shares dropped $1.64 to $18.35 in heavy trading on the New York Stock Exchange. Blockbuster is 82% owned by Viacom Inc.