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Blockbuster still not crazy - April 29, 2008

Another day, another deal for Blockbuster. This time, the video rental chain is reported to be in talks to take an equity position in the recently announced pay-TV and VOD joint venture among Paramount, Lionsgate and MGM in a bid to gain digital rights to the movies the three studio partners run through the as-yet-unnamed channel. And it's getting the same sort of reception from Wall Street and many in the media as greeted its unsolicited bid for Circuit City, which is to say, somewhere between revulsion and derision.

Stacy Widlitz of Pali Research urged Blockbuster to stick to its knitting and stop trying to buy things:

Instead of focusing on improving fundamentals, they blindsided investors with the CC offer. Investors did not react well. Now it seems they are considering another large investment that would likely pay little to small dividends. And investors will become even more frightened. Our best advice to BBI is to stop thinking big and sell investors on their improving fundamentals. Keyes is an operations guy. He is improving BBI’s operational profitability. He should stick to what he does best (reg. req.).

PaidContent called the latest bid "desperate."

Maybe so. But as Media Wonk argued with respect to the Circuit City bid, there's defensible strategic logic behind Blockbuster claiming a piece of the new studio venture.

Clear digital rights to the movies on the new Paramount/MGM/Lionsgate channel would allow Blockbuster to launch a subscription VOD business, perhaps through its Movielink subsidiary. Although Widlitz claims that plans for an S-VOD service in addition to Movielink's existing download plans "shows a lack of coherent digital strategy," for Blockbuster, Media Wonk believes that, for Blockbuster--or Netflix for that matter--to have a viable future online they must offer subscription VOD. It's far more important for rental operators, in fact, than a la carte paid downloads.

Both Blockbuster and Netflix are aggregators of content that has been made available on DVD. Blockbuster remains anchored in the world of bricks and mortar while Netflix has gone partially virtual, but fundamentally, both offer the same service.

Netflix actually charges for its service like a service--with monthly subscription fees--while Blockbuster still lets you pay as you go. But as the business moves from physical DVDs to digital delivery, the logic of a service-based business model is obvious. For both retailers the issue is the same: subscription-VOD is the obvious model for carrying over the franchises they've built with DVDs into the digital realm.

Trouble is: it's damn hard to do because legacy rights issues prevent any one operator from functioning as an S-VOD aggregator. In some cases--as with Disney's deal with Starz!--S-VDO rights are locked up exclusively for several more years; in others, digital S-VOD rights clash with the S-VOD rights included in pay-TV deals, meaning online operators can lose access to movies during their pay-TV windows.

Getting clear title to digital, subscription-VOD rights to as many movies as possible is going to be critical to any rental retailer looking to set up shop online. That doesn't necessarily mean you need an equity position in a pay-TV operator, but that's one way to do it.

Perhaps sticking to its knitting would deliver greater value to Blockbuster shareholders than pursuing acquisitions or making down payments on rights that won't even come available until the end of 2009. Financial analysis isn't Media Wonk's bag so I won't argue with that proposition. But in terms of the direction in which the business is most likely to move, those aren't horrible strategic bets.


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