Bit Rate

Blockbuster + Circuit City = Huh?!

4/15/2008 1:02 AM

As the content world goes to all-digital distribution, Blockbuster makes a $1 billion-plus play to reinforce its bricks-and-mortar footprint, with a hostile bid for Circuit City Stores.

Does this make any sense? Not to Wall Street, which, to quote Tigger, was confuzzled about this deal. Blockbuster shares fell 10.2% yesterday, closing at $2.81.
 
"Blockbuster has enough to worry about in conducting its own business, completing its own turnaround,” Wedbush Morgan Securities analyst Michael Pachter told The New York Times

Seeking Alpha blogger Todd Sullivan says Blockbuster is doubling down on the wrong business model: "The larger issue is, what is Blockbuster trying to become? It has a valuable franchise in video; if the company would just realize the video store concept is officially dead. Adding more brick and mortar locations, diluting shareholders and maxing out the credit line to acquire another problem is a huge mistake."

But wait — the deal really is driven by new media, claims Blockbuster CEO Jim Keyes (who used to run 7-Eleven).

Keyes is positioning the Circuit City bid as harnessing the "convergence of media content and electronic devices." 

"We would seek to differentiate products in both Blockbuster and Circuit City stores by offering exclusive content and content-enabled devices," Keyes said in a letter outlining the takeover bid to Circuit City chairman and CEO Phil Schoonover.

That’s a dubious strategy.

Apple has made a business of tying content to devices, but even with its cult-like customer base Apple has been forced to cut holes in its walled garden. Meanwhile, Circuit City had questions of its own about the proposal; namely, how the heck Blockbuster would line up financing.

A more interesting path for Blockbuster — the only real way forward from its existing business model — is delivering direct-to-the-TV digital video rentals. The Hollywood Reporter says the retail chain is quietly cooking up a set-top box, as is Netflix, which is Blockbuster’s chief rival at this point.

Instead, the billion-dollar bet is on Circuit City. Blockbuster’s hazy hypothesis is that customers will be willing to buy their content and content-playback devices from the same retailer simply because they’re one and the same.

Memo to Keyes: bundling media with devices isn’t going to work the same way as bundling corndogs with Slurpees. Confuzzle, indeed.

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