A judge is expected to rule within weeks on whether a lawsuit filed by four independent video stores against Blockbuster Video and seven Hollywood studios may be certified as a class action suit. The suit charges Blockbuster and the studios with attempting to fix prices, a violation of the Sherman Act and California state law. The suit was filed last year in a Texas federal court.
Class action certification would enable the plaintiffs to seek damages and injunctive relief on behalf of thousands of independent video stores. The suit will go forward regardless, says John Merchant, a plaintiff in the case and president of the Fairness Alliance of Independent Retailers (FAIR). If class action is denied, they will add as many named plaintiffs as possible to enlarge the scope and impact of the lawsuit.
At issue are special purchasing agreements and revenue sharing deals between Blockbuster and the studios that give the chain a substantial and illegal advantage over its smaller rivals. Rather than buying videos outright, Blockbuster pays little or nothing upfront and agrees to share 30 to 40 percent of the rental income with the studio.
Independents generally buy videos for about $75 each. While Blockbuster turns a profit immediately, independents must rent the tape about 25 times to break even. Revenue sharing on at least some titles is available to independent stores, but their percentage of the rental income is much smaller than Blockbuster’s, even accounting for the 5 percent that goes to a middleman. The return is so low, most independents don’t consider revenue sharing a viable option.
More than 4,100 independent video retailers have gone out of business since 1998, according to the National Association of Video Distributors. Blockbuster has 6,900 stores and accounts for a stunning one out of three rentals nationwide. Hollywood Video has 1,600 and controls 10 to 15 percent of the market. Both chains plan to continue their aggressive expansion in the next year.
A common Blockbuster strategy is to open a new store within a few blocks of a successful independent and undercut prices until the local store is forced to close. Prices tend to rise once the competition has been eliminated. Christopher Bach, owner of Music Stop Movie Time in Cedarburg, Wis., told USA Today that Blockbuster is now charging as much as $5 per rental in markets where it has a virtual monopoly.
Consolidation has also narrowed the range of titles available. Independent video stores have selections as varied and unique as their owners. Their existence means that just about any film can find space on a retail shelf somewhere. Selection at a chain store, on the other hand, originates largely with the head office. The focus tends to be less on depth and variety and more on providing hundreds of copies of the latest hit. Moreover, Blockbuster has banned NC-17 films and dozens of individual titles in order to maintain a family friendly image.