Blockbuster Deal Doesn’t Add Up

Like many others, a day after the announcement that Blockbuster put in a bid to buy Circuit City, I’m still scratching my head. I just don’t see what Blockbuster brings to the party and how it plans to make a winner out of a combined Blockbuster/Circuit City operation.

Freelance contributor David Elrich forwarded to me Dan Burrows’ analysis of the deal for SmartMoney.com which provides a good view of the ins and outs of this bid.

While Circuit City did post a profit in its most recent quarter, sales were down. The chain made a profit by cutting costs, through improvements in its Canadian division, and with some one-time items. Circuit City itself admits it has a long way to go.

As for Blockbuster, with the specter of broadband downloads looming one CE insider put it, “The movie rental business is a dead business. Will you need a physical store that rents movies in the future?” The chain knows it’s in a fight with arch-rival Netflix and argues that the deal could help it develop and sell its own proprietary digital content delivery devices. Many are unconvinced.

Sure, Blockbuster investor Carl Icahn gave its blessing to the deal, but when you look at Blockbuster’s recent full-year results, the whole thing looks like a stretch. In the year ended Jan. 6, Blockbuster had flat revenues of $5.54 billion and a net loss of $85.1 million vs. net income of $39.2 million for the previous year.

And what about Mark Wattles? Our associate editor Colleen Bohen made the point this morning that Wattles, who was Blockbuster’s leading competitor when he ran the now-departed Hollywood Entertainment chain, now seems to be competing against his former rival for control of Circuit City. Or maybe Blockbuster, Wattles and Icahn may join forces. Some say they already have.

By the way, Blockbuster still dabbles in consumer electronics. In 2000, it began to carry DirecTV. In 2001, it signed a deal with RadioShack to have the CE retailer sell hardware from kiosks at its store. By early 2002, Blockbuster decided to try and market CE on its own. Today it sells Playstation3 consoles and video games.

And the fate of Circuit City is on the minds of many in the industry. One regional competitor I spoke to cautioned that while the chain’s problems might help all retailers in the short term, over the long haul the demise of Circuit City, "would hurt the industry because more sales volume would be centralized by fewer national chains."