Loyal Deal readers will remember that Blockbuster has been on our radar since 2005, when Ben Fidler wondered in a "Ticking time bomb" column if the emergence of online movie rental services such as Netflix Inc. and competition from big-box stores such as Wal-Mart Stores Inc. (and now even Best Buy Stores Inc.) would doom the Dallas-based company. To be sure, Blockbuster did adapt years ago to industry trends better than its main rival, Movie Gallery Inc., which is currently in a bankruptcy proceeding and is trimming down one-third of its 3,640 stores.
Movie Gallery, the second-largest video rental chain behind Blockbuster, hit tough times because of an ill-timed $1.25 billion acquisition of Hollywood Entertainment Corp., which not only saddled the company with too much debt, but also bet its future on direct competition with Blockbuster's retail locations. But that move left it bereft of an answer to Netflix.
Blockbuster, however, didn't ignore Netflix. It emulated it. Blockbuster's move toward online rentals has already shown some marginal success; the company earlier this week projected a first-quarter net income of $30 million, compared to a net loss of $49 million in the same quarter last year.
But Blockbuster's aggressive (desperate?) move to buy the larger Circuit City outright -- its market capitalization of $630 million is smaller than that of Circuit City -- has raised eyebrows. A Wedbush Morgan Securities analyst even wrote in a note that the bid "borders on being reckless."
Maybe so, but perhaps the move indicates that Blockbuster has seen the writing on the wall and is seeking to expand its business beyond video rentals to the broader home entertainment sector. In other words, it's a strategic maneuver and not a tactical one that it employed in response to Netflix.
Not only is Circuit City a bigger company, but as The Deal's Michael Rudnick reported on Monday, Blockbuster has only about $185 million in free cash on its balance sheet. Whether or not Carl Icahn can pony up enough money to backstop a rights offering to finance the deal, we're left with the same question: What does this move say about the industry's increasingly bleak future? It appears that the video rental industry's largest player has already conceded that in-store movie rental chains could soon go the way of VHS tapes. So if Blockbuster can't convince Circuit City shareholders to bite, will the ticking time bomb finally explode? - John Blakeley
Comments
Blockbuster Inc.'s puzzling unsolicited bid for Circuit City Stores Inc. sheds light on the state of the in-store video rental industry, one which could be teetering on the brink of extinction.
Despite being a poorly run company, Blockbuster does have a large incumbant market share (over 40% worldwide) in video rental business - one of key channel for the distribution of films and games.
Blockbuster will always have an incumbent advantage when its comes to studio relationship and content distribution rights. Since its rental revenue is 5 times that of NetFlix.
This is a key area that Blockbuster should exploit in its turnaround effort.