Bankrupt Blockbuster Dished Up

After some six weeks on the auction block, beleagured Blockbuster has found a buyer. The Dish Network has agreed to purchase its erstwhile competitor. The company won the auction with a bid of some $320 million and expects to pay ~$228 million once other transaction adjustments are completed. The purchase process will reportedly be finished by the end of the current quarter.

"With its more than 1,700 store locations, a highly recognizable brand and multiple methods of delivery, Blockbuster will complement our existing video offerings while presenting cross-marketing and service extension opportunities for DISH Network," said Tom Cullen, executive vice president of Sales, Marketing and Programming for DISH Network. "While Blockbuster's business faces significant challenges, we look forward to working with its employees to re-establish Blockbuster's brand as a leader in video entertainment."

In other comments, the company has indicated it wants to use current Blockbuster stores to distribute/showcase Dish service. Craig Moffett of Bernstein Research called Dish's move "strategically puzzling." He remarks "We find it difficult to imagine Blockbuster's rapidly shrinking store base becoming a source of significant incremental gross additions for the core Dish Network pay TV service." We agree.

Dish's services seem a poor match for Blockbuster's business focus. Further, there's no easy way for Dish to turn Blockbuster back into a profit center, the company's optimistic comments notwithstanding. Blockbuster is one of a relative handful of companies rendered almost completely anachronistic by the advent of digital distribution at the one hand, and kiosk rentals at the other. Cullen's reference to 1,700 store locations is disengenuous—when Blockbuster filed for Chapter 11 last September, it had 3,300 stores—nearly twice the current number.

Some of the 1700 remaining stores are undoubtedly profitable. Urban stores in areas with high foot traffic, for example, might remain firmly in the black for the forseeable future. Such stores could offer a convenience that rivals video-on-demand but run into problems from nearby rental kiosks that offer identical titles with minimal overhead. They may also face increased operating costs as store closures reduce Blockbusters' movie orders and therefore its access to bulk purchasing discounts.

In the face of these problems, we suspect the majority of Blockbuster stores might as well be boat anchors as far as Dish is concerned. Blockbuster's chief value lies in its brand, not its storefronts. Once the acquisition is complete, we expect the satellite TV provider will liquidate most of Blockbuster's physical assets, save for those that remain pertinent to Blockbuster's new position.

Dish is unlikely to spend much time/effort to rejuvenate the market presence of America's last major movie rental chain. Once it disposes of Blockbuster's brick-and-mortar detritus, Dish will be free to launch a kiosk program, continue Blockbusters' own Netflix-like service, or (and this seems most likely), apply the Blockbuster moniker to its own movie channel offerings.