News Corp. Sues Hollywood Entertainment

News Corp.’s 20th Century Fox Home Entertainment has sued Hollywood Entertainment Corp. for allegedly underreporting at least $5 million in revenue on videos leased from the studio via Rentrak Corp., a Portland, Ore.-based distributor. A suit by Rentrak alleging similar actions was filed in April.

The case is the latest involving revenue-sharing programs that have been reviving the video business by putting more copies of popular titles on store shelves. Video retailers pay a smaller upfront fee for the videos, then split rental income with the studio. Rentrak is the leader in this field and supplies videos from Fox as well as other studios.

The proliferation of revenue-sharing arrangements in the video rental business has created tension between video store owners, who believe their profits are being eroded, and suppliers, who say chains are underreporting sales to them.

Such revenue-sharing arrangements can foster distrust because one party controls the revenue information.

Rentrak itself was sued last month by the Video Update chain. The retailer accused Rentrak of violating antitrust laws; that suit, like Rentrak’s against Hollywood, is ongoing.

Fox alleges that Hollywood’s underreporting began in July 1997. That was shortly before Fox Video President Jeffrey Yapp abruptly left to become president of Hollywood Entertainment, the nation’s second-largest video rental chain. Fox accused Yapp of breach of contract, but settled the matter out of court earlier this year.

Fox officials would not comment beyond a brief statement saying that Fox would “vigorously enforce its rights” in the matter. A source at Hollywood Entertainment who declined to be named said both the Rentrak and Fox suits were without merit.

In a separate development, Hollywood Entertainment announced Thursday it will acquire Reel.com, the leading seller of videos on the Internet. The transaction is valued at $100 million--$70 million in stock and $30 million in cash. At the same time, an investment group that includes billionaire Paul Allen and Scott Beck--former chief executive of Boston Market and former vice president of Blockbuster Entertainment Corp.--will buy 5 million shares in Hollywood.

Though the Web firm is not expected to add to earnings for the next “several quarters,” according to Hollywood executives, the purchase reflects a growing recognition of “e-commerce” by more traditional retailers.

Bloomberg News was used in compiling this report.