Blockbuster: This Is One Confused Company

Well, Blockbuster has finally done it. After years of simply copying the Netflix business practices (the movie rental via mail model and the Internet video model), it’s definitely done something that Netflix is probably never going to do — offer to buy Circuit City.

I find Blockbuster’s actions to be confusing and inconsistent. In their last quarterly call, Blockbuster officials talked about how they were finally about ready to unveil the Movielink services through a consolidated Web site. They also talked about the potential to go above and beyond what Netflix was offering via its Watch Now Internet video service by examining the potential to not only provide Internet video as a free value-added feature, but to start experimenting with transactional models that could include both subscription and a la carte features.

Despite its challenges, Blockbuster still has quite a bit of clout with Hollywood, so perhaps they could have gone the route of experimenting even with earlier day-and-date type of releases. Now, this sort of activity would be very sporadic, and it wouldn’t open the floodgates to moving all content to earlier release windows.

However, Blockbuster officials talked during the March earnings call about having an exclusive 60-day window offer on film rentals from the Cablevision unit IFC Entertainment. Particularly with smaller and independent film studios, day-and-date is more likely to occur as artists and studios may want more of a viral launch of their films to generate buzz. Blockbuster certainly has that capability with the Movielink service.

Why Circuit City?

The letter from Blockbuster Chairman and CEO Phil Keyes to Circuit City’s chairman, president and chief executive officer Philip J. Schoonover mentions the ability of both Blockbuster and Circuit City to “differentiate products in both Blockbuster and Circuit City stores by offering exclusive content and content-enabled devices.” I question this strategy on a couple of fronts.

First, is the exclusive content just going to be mostly the independent films, such as those brought to the table from the IFC Entertainment arrangement? I don’t see this as particularly interesting in a brick-and-mortar environment, but as I mentioned above, it could benefit an electronic distribution model, where keeping the costs of distribution low is important, and encouraging consumers to discover content that they otherwise may have not thought was relevant to them could be profitable.

Second, does Blockbuster really want to turn its rental stores into consumer electronics stores? I’m not saying that a successful business can’t be built on that idea, but one must also look at the experiences of retailers such as Radio Shack and CompUSA (before its demise) in trying to become consumer electronics players. Both have struggled, and the struggles may be less due to some of the obvious challenges — such as Radio Shack’s limited shelf space — than to corporate culture.

Strange Timing

Blockbuster paid pennies on the dollar for Movielink last August, so the potential merger with Circuit City and a retrenched focus on DVD sales and rentals doesn’t necessarily mean that they would have lost a ton of money (assuming that the online services development takes a backseat to a reorganization of the Circuit City retail business). With the end of the high-definition DVD format debate, Blu-ray players are certainly going to sell in greater numbers this year versus last. (We’ve pegged stand-alone Blu-ray player sales in the U.S. in 2008 north of 3 million units, up from the measly 1 million units sold in 2007.)

Still, it seems like a curious time to be visiting the retail space, given the progression toward electronic movie delivery, Circuit City’s struggles, and Blockbuster’srumored focus on developing a Net-connected set-top box to take advantage of its Movielink content. It just seems that now is the wrong time to be getting distracted by the potential pitfalls that a Circuit City merger will bring.

It’s too bad that Blockbuster is (again) late to the game with looking to DVD rental and download kiosks as a way to reduce their retail overhead costs and begin delivering movie content in more convenient ways. To me, this seems like an area that offers much more upside than the acquisition of a struggling retailer. Company officials gave some commentary on their kiosk strategy during the March 6 earnings call, but there was very little detail provided.

Given Blockbuster’s well-known brand, I would have thought that they would want to be more active in exploring the rollout of things like video download/download-to-burn kiosks that they could set up not only in their own stores, but also in grocery stores and pharmacies (a la Polar Frog Digital orTitleMatch). It looks like they’re going to get left in the dust yet again.

The Best-Laid Plans

My final thought on this potential merger is to simply remember how the Circuit City and Digital Video Express (DIVX) DVD business self-destructed in the late 1990s.

It just seems like these combinations between specific content and retail businesses just don’t pan out the way they were originally envisioned.

Kurt Scherf studies developments in home networks, residential gateways, digital entertainment, technology development in the housing market, and residential and building management and controls. Kurt is the sole author or contributing author/analyst to more than 60 research reports and studies produced by Parks Associates since 1998.

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