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Edward Stead has a surprise hit on his hands. When Stead joined Blockbuster Inc. in 1997, the video rental company was on pause … maybe even headed for rewind. Entertainment and media behemoth Viacom Inc. had bought Blockbuster in 1994 for about $8 billion, but business began lagging as consumers and investors waited on new technology for watching movies at home. But so-called video-on-demand that depends on high-speed DSL lines hasn’t happened yet. What’s happened instead is that Blockbuster has lived up to its name. When Stead came to Blockbuster from Apple Computer Inc., the video company had posted earnings of $207.9 million on $3.3 billion in revenue. Last year earnings hit $534.8 million on revenue of $4.96 billion. This year is expected to be even better, as higher-profit-margin DVD rentals account for more of Blockbuster’s business. Parent Viacom, which took 17 percent of Blockbuster public in 1999, is so pleased with its subsidiary’s performance that in March it nixed a plan to sell shares of the other 83 percent of the company that it still owns. Blockbuster, which is based in Dallas, now has 7,700 stores in North and South America, Europe, and Asia. It’s engaged in a series of promising partnerships with companies ranging from RadioShack Inc., which has begun selling electronic equipment in Blockbuster stores, to DirecTV Inc., which is banking on the Blockbuster name to sell more pay-per-view movies. As general counsel, executive vice president, and secretary, Stead, 54, has helped manage and negotiate this growth and these alliances. He helped forge revenue-sharing agreements with the movie studios that brought Blockbuster more copies of popular releases, which lured more people into the stores. He’s also managed to stay in really good shape. Stead — an avid skier, surfer, and mountain biker — was in training for a triathlon, his first, when we met over lunch at a Mexican joint a few miles and a world away from Blockbuster’s plush top-floor, downtown Dallas digs. Stead is joining his college-age son in the race. But the day we met he was going home to his 1-year-old, and he said he couldn’t wait. Corporate Counsel: Why did you leave Apple? Edward Stead: I was on my third CEO in three years. I’d had enough. I have an Apple T-shirt that says, “Been there, done that.” That’s how I felt. I wasn’t sure I was going to work at all anymore. Law firms in Silicon Valley were a lot less entrepreneurial than large companies. So I decided to look into telecom and entertainment. Despite what the law said about deregulating, with telecom it wasn’t going to happen for a long time. I thought entertainment would be fun and different. I talked to the Viacom CEO, and we had common interests. My wife is from Texas and was excited about going back. So we gave it a try. Much to my surprise, I like Texas. CC: Tell us a little about the transformation you’ve seen Blockbuster undergo. ES: The company is totally different than when I got here. There are a lot of new people, and the company has become cohesive. There’s been a lot of tearing down and rebuilding in a short period of time. I came here to be a part of that. I hired everybody in the legal department — either from firms in the Dallas area or other companies. There was [only] one lawyer who was here when I got here. We’ve got a really good group of lawyers. [There are 18 now.] CC: You were in the computer industry for a long time — first at IBM, then as general counsel both at Cullinet Software Inc. and at Apple. What are some of the differences between lawyering in the computer and the entertainment businesses? ES: This industry is a lot of fun, and you can make money. The computer business is one-dimensional, particularly in Silicon Valley. That’s not the case with the entertainment industry. At Apple the legal work was more all-consuming. Here the legal strategy is really supporting the business strategy. It’s much more intertwined. At Apple even the CEO did not have a great effect on strategy, because in the technology business every programmer tries to invent their own strategy. Here the strategy is straightforward, and you see results quickly. Also, dealing with the studios is different. They’re very … How should I put this? … personality driven. There are a lot of reasons that studios do things that aren’t apparent from a business standpoint. CC: Viacom — one of the world’s largest media and entertainment companies — owns CBS, MTV, VH1, Paramount Pictures, Showtime, and numerous other purveyors of modern culture. How involved are the Viacom bosses in your work for Blockbuster? ES: Viacom is for the most part hands-off in terms of letting us run the business, and helpful where they can add value. At least that’s their intent, even if it doesn’t happen sometimes. CC: What exactly does your department do, and how do you do it? ES: Most of our legal work is transaction-related. Licensing deals with studios, acquisitions of stores, and that sort of thing. We do a lot of real estate work. We’re doing about 1,000 new leases a year, and renewing another 1,000. We do some of that inside, and some of it outside. We use local firms for some work. But it’s all managed by our in-house real estate lawyers. We’ve also got 90,000 employees and do just about all our employment law in-house. We have a transaction group that does most of the acquisition work, though we’ll go outside occasionally. We do all the studio-related work inside. We have operations lawyers in London and Melbourne, Australia, to oversee Europe and Asia, and another two in Dallas that handle everything that comes out of the stores. Marketing and trademark work is all done inside. CC: How do you handle litigation? ES: We use outside counsel, managed inside. We use Rob Walters at Vinson & Elkins the most for litigation … . We get litigation in, and I make an assessment right away. Is it something we want to settle? A lot of cases we just deal with and move on. CC: One particularly thorny case is looking good for Blockbuster … . ES:Independent video retailers sued us over revenue-sharing agreements with the movie studios. They sued in Texas state court but, when it wasn’t looking good for them, had it removed to federal court in Texas. When that judge denied them class certification, they refiled the case in Los Angeles. That judge also has denied class certification. CC: Blockbuster recently allied itself with DirecTV. On the surface, it seems odd for a video rental company to cut a deal with a pay-per-view purveyor. What does each party stand to gain? ES: Since the fall we’ve been selling DirecTV subscriptions in Blockbuster stores. We’re already one of the top three sellers of DTV subscriptions. There was a lot of doubt about our ability to use our brand name to sell other things, and we dispelled that. We get paid for subscriptions and for installations. And we’re going to be rebranding DirecTicket; now when you order a movie on DirecTV it will be called Blockbuster Ticket. We’ll be getting a percentage of the pay-per-view revenue. We think we can, through our brand name, increase the movie take rate on DirecTV. Video rentals were seen as a threat to the movie business, but it didn’t turn out that way. And DirecTV wasn’t a threat to video rentals. Every time there has been a new technology in the movie business, it’s been incremental to the existing revenue stream. Someday the movie studios will acknowledge that, and, instead of trying to kill new technology, will try to encourage it. CC: When video-on-demand loomed as a threat to video renting, Blockbuster entered into an agreement with Enron Corp., which would provide transmission lines for Blockbuster-branded video streaming content. That deal fell apart. But it shows Blockbuster has been trying to hedge its bet on the future of video rentals, doesn’t it? ES: When we all got here, the video industry was on the decline. We changed the business model, and that’s changed the industry. [Blockbuster used to pay studios up-front for a certain number of videocassettes of hit movies. But it couldn't afford to pay for enough copies to satisfy consumer demand for hit movies. In 1997 Stead and other Blockbuster executives started a revenue-sharing deal with the studios. Blockbuster pays a smaller up-front fee, but shares rental revenues with the studios, which have an incentive to provide more copies.] DVD has brought additional interest. We have 48 million active customers. One thing that’s clear is that video stores are here for a long time to come. Video-on-demand infrastructure is very expensive, and very few people will have DSL in the near-term, and the studios have to decide to make content available. [CEO] John [Antioco] calls it “video-on-delay.” CC: So what is your favorite movie? ES: “The Godfather.”

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