Blockbuster Exclusives, the First-Sale Doctrine and Competition over Content

I was in a Blockbuster video store this morning for the first time in a very long time. In my house, I run our Netflix queue, while my wife makes the rare foray to Blockbuster—usually for something kiddish. But I did the return this morning and actually went in to look around. What caught my eye immediately are the new Blockbuster exclusives that it is pushing heavily in its stores. A quick online tour makes clear—sort of—what is going on.

In mid-November of last year, Blockbuster announced a new deal with The Weinstein Co. The latter is the post-Miramax production company for Bob and Harvey Weinstein. The consequence of that deal, as the Blockbuster site tells us, is to make Blockbuster the “only authorized rental source” for films distributed by The Weinstein Co. These films include Shut Up & Sing, a documentary about the Dixie Chicks and their conflict with President Bush; Factory Girl, a biopic on Andy Warhol and Edie Sedgwick; and Bobby, another biopic this time on Bobby Kennedy.

So we won’t be able to get these films at Netflix and instead will have to go into Blockbuster, right? Not exactly. Section 109 of the copyright statute sets forth the current version of the first-sale doctrine. First-sale came into the copyright statute in the 1909 act after the Supreme Court had decided Bobbs-Merrill in 1908. Under first-sale “the owner of a particular copy or phonorecord lawfully made under this title … is entitled, without the authority of the copyright owner, to sell or otherwise dispose of possession of that copy or phonorecord.” Section 109(b) does limit the operation of the rental market but only for sound recordings and computer programs.

Here is what this means. So long as The Weinstein Co. sells these DVDs to the public, Netflix can buy them and rent them out, as indeed it does. Blockbuster’s exclusivity then is mainly about prices and advertising. In agreeing to in-store promotions of the Weinstein movies and guaranteed payments, Blockbuster is ensuring presumably better pricing for the DVDs than Netflix will be able to get in the retail sales market. (Query: does Netflix by these in bulk from Wal-Mart or Costco?) The Weinstein Co. of course could abandon the sales market and thereby give Blockbuster genuine exclusivity, but Blockbuster isn’t willing to pay for that. Instead, given the sales channel, the exclusive deal with Blockbuster gets Weinstein Co. superior in-store advertising, while raising Netflix’s costs of competing.

Plus there is a hint that the exclusivity is slightly more complicated. The Blockbuster website suggests that the Blockbuster versions of these films comes with special bonus content. The Renée Zellweger vehicle Miss Potter comes with “a fascinating first-person account of Renée’s experience from pre-production through completion of filming” taken from “rare footage from the set.”

For this exclusivity to be meaningful, Weinstein would need to be releasing separate DVDs into the sales channel and at Blockbuster. We frequently see business-model tailored content and this would be another example of that. By business-model tailored content I mean content that is created or defined to meet the requirements of a particular business model or business entity. For example, Wal-Mart notoriously will not carry certain content, so the film that might be available for purchase there might be quite different from the version available on Netflix.

This is, as they put it, a testable proposition. The real question is do I want to rent Miss Potter twice? Netflix tells me, quoting Stephen Holden of The New York Times, that the film is the “cinematic equivalent of a delicate English tea cake whose substance is buried under too many layers of icing.”

I guess the test will have to wait.

Comments

[Jim S]

On a recent long flight I found myself a captive audience for Miss Potter. Sweet flick; but two helpings may be like two pink packets in your iced tea.

[Alvin]

Mr. Picker,

Could you expand more on the "first sale doctrine" with regards to this arrangement? Can I buy a case of Pepsi or Coca-Cola soft drinks and just sell them at the park during a little league game? What about Netflix interferring with contract (between Blockbuster and Weinstein), and aren't there restrictive terms for non-Blockbuster purchasers that they can't rent, license, etc. to others? Just want a clarification/understanding of this doctrine, thanks.

[Cory]

Is Netflix or Blockbuster actually buying DVDs? If they are leasing the DVDs, as is common in the industry, the first sale doctrine would likely not apply (though it would once the leasee is allowed to sell the DVDs to the public).

"Rentrak Corporation ( www.rentrak.com / Nasdaq: RENT) is an information management company and the world's largest processor of rental and sales data for home entertainment media obtained on a revenue–sharing basis. The company services most motion picture studios and thousands of retail video rental locations throughout the U.S. and Canada. Rentrak's Pay–Per–Transaction (PPT) system allows retailers to lease DVDs instead of purchasing them, which reduces retailer risk, effectively broadens and deepens video rental store inventory, and increases customer satisfaction."

http://www.rentrakonline.com/content/services/qa.html

My completely unsubstantiated guess here is that Blockbuster is going outside the usual channel, such as Rentrak, and leasing DVDs directly from the studio on a revenue-sharing basis.

[Ben Gates]

Whatever happened with the lawsuit that was filed against Blockbuster for false advertising in relation to their "no late fee" campaign? It seems like they have bounced back nicely since that event.

Ben Gates
Founder
www.locateapersonalinjurylawyer.com