Blockbuster, DirecTV in Pay-Per-View Pact

Blockbuster, the company that collected $4.5 billion in revenue last year by renting movies on videocassette tapes, struck an unprecedented deal Tuesday with DirecTV to persuade customers to order pay-per-view movies instead.

The marketing deal is an admission by Blockbuster that its low-tech means for distributing movies is bound to be challenged by high-tech rivals who allow customers to order movies from their living rooms with a few clicks of their remote controls.

If the partnership works, satellite dishes could become as familiar as VCRs.

Blockbuster Chief Marketing Officer Jim Notarnicola acknowledged that pay-per-view services offered by cable and satellite TV providers “will cannibalize our core business somewhat.” But he insisted that Blockbuster will make at least as much revenue on a pay-per-view order as it currently makes on a traditional video rental.

The deal allows Dallas-based Blockbuster to hedge its big bet on renting videos and DVDs by getting a piece of the new technologies that threaten its core business, analysts said.

Eventually, Blockbuster plans to turn its stores into showrooms for the latest home entertainment technologies, Notarnicola said. As its stores substitute slim DVDs for bulky videocassettes, they will have more room for such displays, analysts said.

“They had to come up with a new strategy, and they’re embracing new technology,” said Jeff Hoskins, senior analyst with Seidler Cos. in Los Angeles. “Their strategy is to become a provider of home entertainment to consumers no matter what the medium--physical video rental, video on demand, video streaming or pay-per-view.”

Video on demand--the ability to instantly view any movie any time--is perhaps the most significant future threat Blockbuster faces.

Blockbuster, the world’s largest video rental chain, with 42 million customers, will begin selling DirecTV systems this fall. Meanwhile, DirecTV’s Direct Ticket pay-per-view service will be rebranded to include the Blockbuster name.

DirecTV will pay Blockbuster an activation fee for each system sold in its 5,000 U.S. stores, a monthly commission based on services the customers buy, and a percentage of DirecTV’s total pay-per-view sales above a certain benchmark. DirecTV currently has 8.5 million customers, making it the third-largest pay TV service behind cable operators AT&T; and Time Warner.

Exact financial terms of the deal were not disclosed. Traditional DirecTV retailers earn a commission of 5% of the lifetime value of the contracts they sell, according to industry sources. This deal doesn’t affect the relationships that Blockbuster has with studios that supply their traditional wares, videocassettes.

In a conference call with analysts, Blockbuster Chairman and Chief Executive John Antioco said the deal would boost the company’s overall revenue even though its rental revenue might decline somewhat.

Shares of Blockbuster, a unit of Viacom, gained 50 cents to close at $10.69 in New York Stock Exchange trading Tuesday. El Segundo-based DirecTV is a unit of Hughes Electronics, whose shares rose 19 cents to close at $88.81, also on NYSE.

The threat to Blockbuster is not immediate. Its core video rental business is on track to continue growing for another three years and won’t begin to decline until 2008, according to media research firm Paul Kagan Associates.

Blockbuster is already looking ahead. Earlier this year, the video chain expanded a cross-marketing partnership with America Online and agreed to make some movies available for download on the TiVo personal video recorder. Blockbuster also signed a deal to use video streaming technology to distribute short films from AtomFilms on the Blockbuster.com Web site.

But embracing new technologies may be easier said than done. Blockbuster, whose stores typically sell used videocassettes and candy, may have a hard time selling complicated DirecTV systems, some observers say. Blockbuster said it will put its employees through a sales training program this summer.

The deal could also give Viacom, which just completed its acquisition of CBS, access to a new television distribution network. Walt Disney recently learned the value of satellite TV services when cable giant Time Warner stopped carrying its ABC television signal to 3.5 million viewers for 36 hours during the crucial May sweeps period. Disney responded by giving away about 55,000 DirecTV dishes to Time Warner cable customers.

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Times staff writer Sallie Hofmeister and Times wire services contributed to this report.