How Blockbuster Changed The Rules

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Then there is the number that really catches Redstone's eye: Viacom stock has more than doubled in 12 months, to about $66. The run has been fueled by other developments in Viacom's vast empire, including the sell-off of most of book publisher Simon & Schuster for $4.6 billion, and a hot streak of hit movies, including Titanic. But it would not have been possible without the turn at Blockbuster, which contributes a third of Viacom's annual revenue.

Antioco's strategy is deceptively simple: stock more of the new releases that customers want. Before Antioco, the average Blockbuster customer had to visit a store five consecutive weekends in order to get the movie he wanted. To change that, Blockbuster had to overhaul its business model. In the past the company bought tapes from the studios for about $65 apiece. Because each store has 10,000 tapes, the inventory got expensive, thus limiting the company's willingness to invest in too many copies of one film. Now Blockbuster has revenue-sharing deals with all but a couple of major studios. The deals dramatically lower Blockbuster's up-front costs to about $6 a tape. In exchange, Blockbuster hands over roughly 40% of rental revenue.

The strategy could backfire by cutting profit margins, but Blockbuster is committed. It invested $50 million in a revenue-sharing experiment last year and was thrilled with the results. The company has moved quickly. Last quarter 80% of tapes were obtained via revenue sharing, up from 25% in the first quarter.

This strategy, though it has been around in some form for a decade, is worrying many independent video-rental dealers, who fear they lack the clout to make deals as beneficial as Blockbuster's. "We're at a disadvantage," says John Heim, owner of five video stores in Lakewood, Colo. He says he must pay 55% of revenue to a studio or a third-party broker and that the Blockbuster advantage (he competes with one two miles away) has hurt his business.

Blockbuster's recent success bears that out. The company owned barely 25% of the rental market at the start of the year; now it has a 30% share, and Antioco expects to reach his goal of 40% well ahead of his five-year target. Shirley Poulekidas, a retiree in Chicago, will help him do it. "Anytime I've looked for a new release, it's been there--since they put that sign up," she says, pointing to a guarantee billboard.

Such comments warm Antioco's heart. "It's all about the customer," he says, echoing his sincere, if not totally original, guiding principle. "I've been in retailing 27 years, and I've never seen a response like this. Retailing just doesn't turn this fast."

The reward for Antioco may be to lose his job. Blockbuster's past mishaps have wounded Viacom so deeply that the video giant is all but certain to get cut loose. Last week, underscoring that point, Viacom announced a $437 million charge to write down Blockbuster's old inventory. But the charge also clears the way for better results ahead. Redstone, who will release Viacom's second-quarter results this week, says Blockbuster's improvement should start to boost the parent company's earnings this quarter.