Haverty may be right. But thunderclouds have crept onto Blockbuster’s horizon. Competition is stiffening and the video industry’s meteoric growth is finally leveling off. Walt Disney, for instance, recently entered the rental business and tiny Hollywood Video is growing -rapidly. Viacom is so concerned that it sued the smaller 120-store chain two weeks ago, alleging that, among other things, it illegally raided Blockbuster’s employees. More worrisome are two messy lawsuits in Texas stemming from a 1989 acquisition by Blockbuster. In one case, Blockbuster and codefendants were stunned by a $124 million judgment last summer. Now NEWSWEEK has learned that Steven R. Berrard, Blockbuster’s president and one of Viacom’s rising stars, is being investigated for possible perjury in connection with that same case. NEWSWEEK also has learned that Blockbuster has been hit with a second, almost identical, lawsuit stemming from the earlier deal. At worse, the case could produce a judgment totaling a billion dollars or more, lawyers familiar with the suit say.
If Viacom is concerned about its problems in court, there’s nary a sign of it. The company believes Blockbuster will win on appeal or have the judgment drastically reduced. And it vigorously defends Berrard. Says a Viacom spokesman: “These scurrilous allegations are totally false. There was no perjury, period.” Yet, the controversy surfaces at an inopportune time. Last week Viacom suffered a set-back on a deal that would have helped pay down debt from its multimillion-dollar buying binge. The Ways and Means Committee voted to block a $2.3 billion deal for Viacom to sell its cable-TV operations to a group led by an African-American, thus reaping a $400 million-plus tax break for selling to a minority-owned firm. What’s more, Viacom must quickly convince investors that its financial prospects are bright in an effort to boost its stock. Otherwise, it will have to fulfill a painful pledge to pay out additional Viacom stock to Paramount’s former shareholders.
Blockbuster, with 1994 revenue of more than $4 billion, and Berrard are pivotal to Viacom’s quest to drive the stock price up and help the company grow. The Blockbuster deal announced last year gave Viacom the upper hand in its battle with QVC Inc. for Paramount. Now Viacom is depending heavily on Blockbuster’s cash to help further pay its debts and have money to spare for new investments. in the spotlight is Berrard, 40, who gets high marks for helping Blockbuster dominate the video-rental market. A protege of Blockbuster chairman Wayne Huizenga, Berrard joined Blockbuster in 1987. He has spearheaded the deals and store openings that accounted for the video chain’s exponential growth from the mid-1980s. And he helped diversify the company into film entertainment, through the purchase of a majority interest in Spelling Entertainment, and into music retailing, where it now is the third largest chain.
But Berrard was also deeply involved in the 1989 deal that now is haunting the company. The transaction involved a former big Blockbuster investor, Scott A. Beek, who later became a vice chairman of the video-rental company, and is now head of fast-food chain Boston Chicken. The lawsuit was filed in 1991 by investor Charles Howell of Dallas, who in 1986 sank money in a limited partnership formed by Beck to own and operate Blockbuster stores. Without permission of the partners, Beck, a codefendant, subsequently sold his interest in the partnership to the chain for more than $110 million. That was a violation of the partnership agreement, the lawsuit alleged. Blockbuster didn’t acquire Howell’s interest until 1991, paying him less than the $600,000 he invested. The court found that Beck had sold his interest without proper consent and set total damages at $124 million.
Although Blockbuster has appealed, the two sides are holding settlement talks. Howell’s attorney subsequently filed suit on behalf of two more of Beck’s former partners. The perjury complaint, which the trial judge filed with the Dallas district attorney after complaints by Howell’s attorney, involved alleged discrepancies in Berrard’s sworn testimony during a deposition and at trial on a highly technical but ultimately crucial point in the transaction. Berrard wouldn’t talk about the legal troubles. While an official of the Dallas district attorney’s office confirms the investigation, he declined to comment further.
More legal problems would be troublesome for Berrard and Blockbuster now. The chain must come up with ways to grow before the phone and cable companies figure out how to pipe vast catalogs of movies directly into their customers’ homes-which could spell the death of the chain’s videorental business. Right now Blockbuster’s plan is to expand overseas: in addition to opening 600 outlets in the United States this year-that’s one every 14 hours-Berrard plans to add about 200 foreign stores.
But the days of grabbing business unchallenged is over. Says consultant Bob Alexander: “After watching Blockbuster expand for the last three years, others are not only making a stand but growing.” Several chains are raising money to expand by going public. And then there’s the cheeky Hollywood Entertainment of Beaverton, Ore., owner of the Hollywood Video chain. Founder Mark Wattles plans to almost double the number of stores he operates. Berrard says he isn’t concerned. But in a federal lawsuit filed two weeks ago, the chain accused Hollywood of hiring away five employees that were under contract and stealing its trade secrets. Hollywood’s lawyers say the charges are hokum. Says lawyer Jeffrey Edelson: “If Blockbuster can’t beat Hollywood in the marketplace, it resorts to forcing them to spend significant amounts for defending frivolous claims.”
There are other problems, which may have an impact on Blockbuster’s growth. For example, it has placed big bets on the music business (chart) with its 550 store chain. But music merchants are in the middle of a brutal price war and Viacom insiders say it might sell off the music chain. In addition, the company reportedly scaled back a high-tech venture with IBM to produce CDs on the spot in music stores. Berrard says the reports were exaggerated.
What does this bode for Blockbuster? With the future promising home entertainment at the finger-tip, Blockbuster turned to Sumner Redstone, an empire builder with a strong record for making businesses prosper over the long haul. Redstone, the notoriously litigious billionaire, is well suited to steer Blockbuster through the rocky shoals of the Texas courts. But in the marketplace, where the video king still reigns, feisty rivals won’t be deterred by the Viacom chairman from trying to knock some chips off the old block.
