Video rental giant Blockbuster and Warner Bros this week announced that they had reached an agreement on video rental practices in the UK. The deal is likely to change the structure of the video sector, favouring "sell-through" video and new media at the expense of rentals.
The agreement ends an eight month dispute that started last July when Warner announced that it would no longer maintain a "window" between video and DVD releases of its titles into the rental and retail markets.
Having refused to buy new Warner films for rental use, Blockbuster will begin stocking new Warner titles with immediate effect. The terms of the deal were not disclosed.
Neil McEwan, managing director, Warner Home Video said: "It is important that our titles are available in Blockbuster UK. We want customers to be able to rent or buy the titles they want, when they want, from the outlet of their choice."
Alex Sparks, senior vice president and managing director for Blockbuster UK, said "We are pleased with this agreement which we believe protects the long term interests of our customers and most importantly, will enable us to satisfy customer demand by giving them the best choice, selection and availability for their home entertainment needs."
Despite the platitudes, the implications of the agreement could be wide-ranging and the effects extremely rapid. Some analysts estimate that rental windows in the UK could disappear within a matter of days or weeks. Others feel that video wholesalers will suffer, while rental chains will continue a gentle decline. Under either scenario, independent rental operators are expected to have to adapt the way they do business.
"Video rental windows in the UK could disappear within a year," is the verdict of John Hayward, editorial director of Home Entertainment Week. "The rebels could be in line within a week."
The rebels are the independent retail chains who followed Blockbuster into a boycott of Warner's films. Following Warner's mid-July decision, Blockbuster responded by refusing to stock new Warner titles and put up posters in its UK stores explaining why. Its action was matched by a number of independent chains. Some of these have since decided to re-stock with Warner product, but others held out in the face of what they see as unfair practice.
Part of the problem is that rental operators are asked to buy their tapes and discs at prices two to three times higher than recommended retail prices to consumers. In return they have traditionally enjoyed eight weeks of rental-only use of the titles before they begin to be sold in shops and supermarkets. Warner's July move was seen as making rental operators pay more than retail operators, but removing the trading advantage.
One effect of the boycott included the decision of UK distributor Helkon SK, which had hits including Bend It Like Beckham and The Mothman Prophesies, to stop sub-contracting its titles out through Warner. With the survival of rental windows now in doubt, Helkon SK is now said to be considering whether to fall in with a scheme it "does not believe is optimal" and perhaps return to its alliance with Warner.
Although Warner is keeping pretty quiet about explaining why it maintained such a hard line with such a major client, the company's now departed home entertainment guru Warren Lieberfarb scattered plenty of clues at a speech in November. He said that DVD retail, pay-per-view (PPV) and video-on-demand (VoD) offer "strongly attractive" returns to the studios, compared with rentals.
DVD may have given the sell-through sector's case a double boost. "DVD has led to a new burst of retail activity," says Derek Mann, managing director of the Entertainment Software Retailer's Association (ESRA). And with their smaller size and greater functionality, DVDs have achieved premium pricing status, as rental staple VHS video has been discounted.
While the UK rental trade points out that, despite forecasts of gloom, the last four years have been pretty steady. Last year video rentals generated some £460m of business at consumer prices and brought in a net £110m of revenue to distributors But it just does not offer the upside or fat margins available from other media.
The disappearance of rental windows is also expected to enable studios to protect their pay-TV customers and the extremely rich output deals they have with them. By allowing video retail launches to move forward a couple of months pay-TV premieres can benefit from the expensive press and marketing campaigns that accompany a film's theatrical launch. (Some analysts hint that studio releasing operations may now be prepared to increase their p&a spend, if it influences the high margin sell-through video and pay-TV business.)
Other studios are keen to follow Warner's lead. In January 20th Century Fox indicated that it would close the rental window later this month (March 17) with the simultaneous rental and retail launch of The Road To Perdition. Universal - which did not return Screen International's calls - is believed to close to making an imminent announcement on new rental practices in the UK, having last year cut its rental windows from eight weeks to four. Insiders report that Paramount and Columbia are also close to taking the same step.
Other factors that may have shaped the deal is that Blockbuster is unlikely to pay more for its content. Unlike most independents the giant, which has 700 stores in the UK and 8,000 worldwide, does not buy every title that it rents. Under revenue-sharing agreements hatched with studios and specialist wholesalers over the last four years it splits costs and income with the content owners. Not only does this keep costs and risk low, it has also encouraged the chain to stock revenue-shared titles in greater numbers in every store. Rental store psychology and design are dominated by incentives to encourage impulse buying and to avoid clients walking out empty-handed.
Revenue share deals have been offered to some of the independent rental chains. It is not clear whether this had a hand in the decisions of some to end their boycott of new Warner titles. The nationwide Choices and North of England and Scottish chain Global both dropped boycotts.
The market could be set for some months of turmoil. "We are looking at a mad situation where the three big chains do not pay the higher pricing because of revenue sharing and the smaller guys cheat and rent the retail copies," said Chris Simpson, owner of London's Prime Time chain.
Renting of retail bound tapes and discs - often bought through the wholesalers - is illegal as it contravenes the studios' copyright restrictions. But it is not uncommon and could now become more frequent. Independents which have been caught out have been sent warning letters from studios' legal departments, but so far no case has gone to trial. "I've yet to hear of a rental dealer being issued with legal process over renting retail product, although there have been warning letters," says HEW's Hayward. "What would they be suing for, loss of £20'," asks another analyst. The issue is moot and the price differential between retail and retail copies forms part of an investigation by the UK's Office of Fair Trading.
Used rental copies making their way into and "contaminating" the retail sector has been another thorn in the relationship between rental operators and the studios. Concessions in this area are thought to have been included in this week's Warner-Blockbuster deal. Blockbuster is currently being sued for $120m (£76m), by Walt Disney, which among other things accuses the rental chain of selling videos before their rental life is concluded.
Independent rental chains may have to fight harder to stay in business, perhaps through stocking greater width of copies, better marketing or other local initiatives. But their supporters say that there is still a strong demand for them, particularly in the UK. "Although studios would like to see it go away, Brits like renting," says Hayward. "Not everyone wants to buy everything. Renting is a good way of sampling or indeed simply consuming films."