#60 1997 · Blockbuster (with Rentrak's revenue-share model) · Home video rental
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.
what everyone would do
Buy more copies of hit titles to meet demand, or negotiate a lower wholesale price per tape — the standard retail response to a stockout problem. Neither actually fixes it: at $60-65 a tape, stocking enough copies to satisfy opening-weekend demand for every hit was unaffordable at any volume discount, and every unsold copy of a flop was dead capital the store had already paid for in full.
what they saw
The real misalignment wasn't the price of tapes, it was that studios got paid the same amount whether a tape rented once or a hundred times, so they had no stake in how many copies sat on Blockbuster's shelves — the fixed sale price meant the studio's interest ended at the invoice while Blockbuster alone carried the full risk of guessing demand. Splitting rental revenue instead of selling the tape outright meant a studio's earnings now scaled with actual usage, giving both sides the same incentive: more copies in more stores.
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.
why it works
Cutting the upfront price to roughly $8 while giving studios 30-45% of rental revenue for months converted a purchase with a large fixed cost into a bet with a small fixed cost and shared upside. Because Blockbuster no longer had to recoup a $60 outlay per tape before a copy became profitable, it could stock far more copies of a hit without proportionally increasing its risk, and because studios now earned more from every additional rental rather than nothing after the initial sale, they had every reason to help maximize the number of copies in circulation rather than treat the sale as the end of the transaction. Both sides wanting the same thing — heavy circulation of hit titles — is what let empty shelves during peak demand largely disappear.
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%.
where it breaks
The model depends on there being real, ongoing rental revenue to share — for a low-demand title that rents rarely, splitting revenue instead of collecting a wholesale price can leave the studio worse off than a flat sale, so the mechanism only pays off when demand is high and sustained enough for a revenue share to exceed what a fixed price would have captured. It also requires both parties to trust the reporting of actual rental counts, since a revenue-share arrangement only works if the studio can verify how much was actually collected — without reliable, auditable usage data, the studio has no way to confirm it's getting its fair share, and the incentive alignment collapses back into a pure trust problem.
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.
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