Blockbuster split rental revenue with studios to stock more hits

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.

Switched from buying tapes to revenue-sharing: pay $8 upfront, give studios 30–45% of rental revenue, aligning incentives to stock more copies.

Lower upfront cost let Blockbuster buy many more copies of each hit without huge cash outlay.

Studios earned more per rental, so they wanted more copies in stores, not just sales.

Both sides shared the goal of high circulation, reducing empty shelves and lost rentals.

When inventory cost caps supply, shift from fixed purchase to revenue share so supplier gains from usage, aligning both to maximize units.

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%. 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.