OPINION: Making the connection

Were I a Blockbuster shareholder, I guess I’d be happy to see the company withdraw its bid to acquire Circuit City. The news sent the shares up more than 13% the day after the news broke, a rare good day for the beleaguered stock.

The news didn’t exactly come as a surprise. Never popular with investors, the deal was pretty clearly doomed after Circuit City reported train-wreck first-quarter results last month, indicating serious, ongoing operational problems at the chain and making it poison to any strategic buyer (Circuit City’s best hope for a buyer now would be a private equity group looking for distressed assets).

Yet I couldn’t help being struck by a number of nearly concurrent events that could be read as bolstering the underlying strategic logic of combining the retailing of entertainment devices and content.

Just days before Blockbuster withdrew its bid, Sony Corp. chairman/CEO Howard Stringer unveiled a broad new corporate strategy centered on network-enabled entertainment devices and digital delivery of content.

According to Stringer, 90% of Sony entertainment devices will be network-enabled by 2011, with TV sets leading the way.

“We want to restore the TV to the center of the home,” Stringer told journalists at the unveiling.

In a headline-grabbing gambit, Sony announced that owners of Internet-enabled Bravia HDTV sets will be able to stream a pay-per-view version of Sony Picture’s summer theatrical release Hancock later this year ahead of its debut on DVD and Blu-ray Disc.

Sony also unveiled its long-anticipated movie download service for the PlayStation 3 as it seeks to position its game console as a platform for getting Internet-delivered content to the TV set.

Also last week, marketing research firm ABI Research issued a new report forecasting a broad surge in network-capable electronics device over the next four years.

As VB’s Danny King reports, almost a half-billion media devices will be connected to the Internet in 2012, up from 150 million this year and less than 100 million in 2007, according to ABI. About 70 million TVs will be connectable in four years, up from 5 million this year, while the use of DVD players for network connections will more than triple to about 80 million devices.

“We’re seeing increasing action in the TV space, especially in Japan,” ABI research director Michael Wolf said. “Now that the next-generation format wars have been resolved, you’re going to see increasingly Blu-ray players with networking connectivity, as companies like Sony push that to make hardware platforms dynamic.”

To that end, Sonic Solutions senior VP Jim Taylor told me in an interview this week that Sonic is working with a number of Blu-ray player manufacturers to integrate Sonic’s Qflix DVD burning platform into Blu-ray drives.

“They’re building these players that are network-enabled for BD Live, but they also want to make sure users can do different things with that capability,” Taylor said.

DVDs and Blu-ray will continue to play a major role in the home entertainment industry for a while yet. But as the music industry has discovered from its experience with iTunes, entertainment is becoming a service more than a product.

And increasingly, that service is being acquired by consumers as part of a device purchase, whether an iPod, a Vudu box or a Nokia cell phone.

For a bricks-and-mortar entertainment retailer, that’s a pretty good argument for positioning yourself to sell devices.

Buying Circuit City may not have been the best way for Blockbuster to get there. But it was headed in the right direction.