It has seemed pretty inevitable to most investors and analysts that US leading retail DVD rental firm Blockbuster had to change or die, and that most likely it would die. That outcome is still in the balance now that it has acquired Movielink, and it will depend upon just how it goes about integrating the online service.
One thing we can say for sure is that back in March 2005, when it was freshly released from Viacom ownership, and bid $1 billion for rival Hollywood Entertainment, it suffered a close shave.
Blockbuster’s instincts at the time were perhaps all wrong and it was trying to merge for the sake of size alone. Instead rival Movie Gallery won the day, and today that merged company is in a financial mess. Its stock in not only under a $1, but it is under 50 cents. It has had repeated warnings from Nasdaq that it will be delisted. It has defaulted several times on its debts, and been given extra chances rather than dragging its creditors through Chapter XI, and it is trying to run a $650 million, 4500 store business with just $27 million of credit left on its books.
It has also tried to change, taking on the Moviebeam business from investors, who took it from Disney before that, for $10 million in March.
MovieBeam was just the wrong choice. Over a three year period it ate up $100 million of Disney’s money, and then proceeded to eat a further $48.5 million from an investment group that included Cisco and Intel. Buying it to get itself out of a cash hole was never going to work and with set tops costing $250, a service activation fee being $30 and movies rented at prices between $3.99 and $1.99, it was always going to be either a slow burner, of a business subsidized by Movie Gallery, a move it simply cannot afford.
We have talked about the concept of the Faultline before. The imagery is that major corporations in entertainment were mining rich seams in their particular neck of the woods when suddenly, the shift to digital markets has changed the very nature of the market and given ownership to another company, in this case Netflix, and possibly, eventually Apple.
But this is an example of exactly that in action, complete with the company’s inability to respond because it wants to save the old business it was in.
Had Blockbuster bought Hollywood Entertainment it would have been reminiscent of that favored investor quote ‘like tying two bricks together and seeing if NOW they float.’ The extra burden on Blockbuster would probably have been enough to bring it down. Luckily for Blockbuster its management saw the light just in time and pulled out of the auction. However the danger is not over yet. Unless someone comes up with a radical new plan to transform the business, Movie Gallery investors will think it is wise to beat a path directly to the door of Blockbuster, and offer it for a price that reflects its current parlous state, a fraction of what Blockbuster was prepared to bid for half of it, two years ago.
New Blockbuster CEO, James Keyes, and previously the boss of the 7-11 group, should think long and hard, and be sure to tie up any debt he needs to turn it around, before taking on yet another brick, investors are hoping he will float.
For the first quarter Movie Gallery revenues fell 6.7% to $648 million, and operating income and EBITDA both halved.