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Converging on Circuit City - June 24, 2008

So is a deal between Blockbuster and Circuit City getting more likely, or less? Hard to tell, exactly. Things looked grim yesterday, after analysts said Circuit's ugly first-quarter numbers, reported last week, could lead Blockbuster to dial back its $6-$8 a share bid for the floundering electronics chain, which caused CC shares to dive more than 20%. This morning, however, the company said it had agreed to add three new members to its board hand picked by activist investor Mark Wattles. Wattles, who once built Hollywood Video into Blockbuster's largest competitor, has been an outspoken proponent of a deal with his formal rival, which would seem to make a deal more likely. Wattles, in fact, said three potential suitors, presumably including Blockbuster, are looking through CC's books and that a deal would be announced probably within a month.

For its part, Blockbuster says it doesn't need the deal to pursue its strategy of driving the convergence of digital devices and content.

In an interview Friday, Blockbuster chairman/CEO Jim Keyes told Media Wonk, "We don't actually need to acquire Circuit City to start selling consumer electronics." According to Keyes, Blockbuster is testing the idea of using sales people equipped with tablet PCs to turn Blockbuster outlets into virtual CE stores.

"You can interrupt the customer as they're standing in front of a [download] kiosk, or a small display, and make an Internet-assisted sale, by helping them through the transaction and ringing up the sale on the spot," he said. "The product would be delivered by mail or overnight to the store for pick-up the next day."

So why spend upwards of $1 billion to buy brick-and-mortar locations you don't need?

"What CC gives me is a bigger box to do demos in," Keyes said. "You can demo videogames, which I think is very important. You need an environment where you can demonstrate the download capabilities of different devices, of set-top boxes and so forth. We can't really do that in the footprint we have now. We can make the big box into a new kind of entertainment destination."

Incidentally, Keyes thinks a lot of people are whack when it comes to thinking about the future of digital delivery. 

"When I look at the way people talk about how digital services will be bought and sold in the future I just can't imagine what they're thinking," he said. "Not everything is going to be accessed directly online and downloaded. When you buy a device for a particular service, doesn't it make more sense for that service to be embedded in the device? Some things are going to be accessed from kiosks, or on memory cards. There will be a lot of different ways to access content. Some of it will be direct to the consumer, some will be through some kind of retail location. All of it will be digital but it will come in a lot of forms."

Whether any of that can happen fast enough to save Circuit City--or Blockbuster for that matter--is another question. One big variable is the studios that control the rights to the most desirable content but regard digital technology warily.

"Some of the studios really get it," Keyes told Media Wonk. "Some of have been very supportive of where we're trying to go, but like the investment community, that's mixed with a lot of skepticism. What I tell them is that if somebody doesn't do this, iTunes will do it for them and will end up controlling the business."


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