#68 1997 · Blockbuster (with Rentrak's revenue-share model) · Home video rentalrisk-transfer
Blockbuster stopped buying tapes outright and started splitting rental money with studios instead
the problem
Blockbuster couldn't afford enough copies of hit new releases, so customers found the shelf empty and rented nowhere
background
Home video economics ran backwards for renters: a store paid a studio the same $60–65 wholesale price whether the tape sold or rented, so stores bought only a handful of copies of any title, hit or not, to control cash outlay. A blockbuster new release drew far more demand than a store could stock, and every customer who found the shelf empty either rented something else or, worse, didn't rent at all — lost revenue neither side could see on an invoice.
Rentrak had built a leasing model for exactly this mismatch: instead of a retailer buying a copy outright, the studio effectively lent it in exchange for a cut of the money it earned renting. Blockbuster signed its first contract on this structure with a major studio in November 1997 and rolled it out across its supplier base through 1998 — cutting the upfront price per tape roughly eightfold while giving studios a running share of the rental income for months after release.
the move
A new-release tape cost a store about $65 wholesale, so stores rationed copies of even the biggest hits — shoppers hunting The English Patient or Jerry Maguire in the summer of 1997 found every copy checked out. Using a revenue-sharing structure pioneered by Rentrak, Blockbuster signed its first studio contract that November: pay only around $8 a tape upfront, and hand back 30–45% of every rental's revenue for a 26-week window instead.
the payoff
Stores could now afford far more copies of each hit; rentals rose as much as 75% in test markets, Blockbuster's overall market share grew from 25% to 31% within a year — a gain equal to its next-largest rival's entire market share — and cash flow rose 61%.
what came after
The realignment turned a zero-sum shelf-space argument into a shared incentive — both sides now wanted more copies in more stores — and the model became the industry standard for video and later DVD distribution, studied since as a textbook case in supply-chain contract design.
filed under
references
- [1]Knowledge at Wharton — Now Showing at Blockbuster: How Revenue-sharing Contracts Improve Supply Chain PerformanceKnowledge at Wharton, 2004knowledge.wharton.upenn.edu
- [2]FindLaw — Revenue Sharing Agreement, Blockbuster Video Inc. (SEC filing)FindLaw / SEC filing, 1997corporate.findlaw.com