By Barry Willis

February 4, 2001 — Are bulk discounts and revenue sharing arrangements with suppliers illegal? A group of independent video dealers thinks so. The dealers have teamed up to sue Blockbuster Video, the industry's undisputed leader, over what they claim are "illegal practices" that they contend have caused many of their colleagues to go out of business.

In the past three years, the video rental business has seen a decline of about 10% in the number of independent stores nationwide, according to figures from the Video Software Dealers Association. Independents now account for approximately 27,000 stores, compared to 7500 operated by Blockbuster, a unit of media conglomerate Viacom, Inc., which also owns Paramount Pictures.

The attrition is directly related to Blockbuster's ability to buy products at deep discounts, according to charges brought against the retailing giant by approximately 200 independent video store owners in a lawsuit filed in Los Angeles Superior Court on Wednesday, January 31. The class action suit charges that Blockbuster made "illegal agreements" with film studios in 1997 and 1998 to share video rental revenue, and benefits unfairly from the film industry's wholesale policies that favor big customers.

Blockbuster has "substantial market power and influence with the Hollywood studios," the plaintiffs assert. Among those mentioned in the suit are Metro-Goldwyn-Mayer, Inc., AOL Time Warner, Inc., Sony Corp.'s Columbia TriStar, Walt Disney Co.'s Buena Vista Home Entertainment, and Fox Entertainment Group, Inc.

The arrangements are violations of antitrust and price-fixing laws, according to plaintiff John Merchant, owner of 49'er Video in Davis, CA. Merchant formerly owned five video stores, but is now down to only one—the result, he claims, of Blockbuster's shady dealings. Merchant told reporters that he had organized a buying group of about 100 store owners to seek arrangements similar to Blockbuster's and was turned down by the studios.

Bulk discounts are standard practice in wholesale and retail businesses of all kinds, a fact that Blockbuster attorneys are certain to bring up in their defense. (News analysts did not mention the coincident rise in the popularity of DVDs, or increased offerings by Direct Satellite Broadcasters, as possible contributing factors in the decline of independent video stores.) Even so, Merchant claims that he and his associates are paying "three or four times as much as Blockbuster" for the same product. "Our frustration is not getting a competitive deal," he told the Los Angeles Times. "We are asking for damages for what they have done to independent retailers and we want the courts to fix the problem. We feel that the only way we are going to get any relief from this is for the court to mandate that they treat us fairly."

The suit against Blockbuster is similar to another suit filed by Merchant and another video dealer in San Antonio, TX. Blockbuster spokesman Randy Hargrove called the California case "another desperate court maneuver" and believes that it and the Texas case are "without merit." Blockbuster's buying power has "greatly benefited consumers and the industry," Hargrove stated. According to published statistics, more than 66% of the American public lives within a 20-minute drive of a Blockbuster Video store.