Disney Sues Top Video Chain

Walt Disney Co. is alleging that the nation’s biggest video store chain made it a Blockbuster nightmare for the entertainment giant by shortchanging it by $120 million.

In a breach-of-contract lawsuit filed this week in federal court in Los Angeles, Disney alleges that starting in 1997, Blockbuster Inc. failed to account for missing videos, improperly charged the Burbank-based company for some promotional costs and prematurely sold videos before their rental life was finished.

Disney argues in its suit that Blockbuster was obligated to properly account for the money and reimburse Disney fairly under a four-year deal.

The company says it has complained for some time to Blockbuster about being improperly compensated. Disney spokesman John Spelich said Thursday that the company “hoped to negotiate a successful conclusion to this business dispute. But unfortunately we weren’t able to and filed suit to protect our rights.”

A Blockbuster spokesman said the company had not reviewed the lawsuit.

The litigation highlights the frequent tensions between Hollywood studios and the powerful Dallas-based video rental chain, which is controlled by media giant Viacom Inc.

The lawsuit stems from revenue-sharing deals that Blockbuster cut with studios in the mid-1990s. Before revenue sharing, Blockbuster bought tapes for more than $60 and kept all of the rental money. Blockbuster then forged agreements to buy videos from the studios at discounted rates.

That allowed Blockbuster to stock more copies for its customers, who had often found themselves frustrated because movies they wanted already were rented out. In return, Blockbuster split profit with the studios.

The system helped Blockbuster boost its market share to 40% by 2001 from 28% in 1998. It also helped recharge the studios’ sagging video business.

The dispute between Disney and Blockbuster applies only to VHS tapes, which are dwindling in popularity as consumers favor higher-quality DVD movies. The revenue-sharing system has quickly become obsolete with DVD sales increasing. Studios are offering the lower-cost discs to rental stores and mass merchandisers at cheap rates, hoping to stimulate direct sales to consumers.

Blockbuster shares rose 56 cents on Thursday to $12.81 in New York Stock Exchange composite trading. Shares of Disney climbed 95 cents to $17.26, also on the NYSE.

Bloomberg News was used in compiling this report.