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Blockbuster: Playing Possum?

By Rick Aristotle Munarriz (TMF Edible)
January 14, 2005

Is Blockbuster (NYSE: BBI) smarter than it's letting on to be?

In an interesting thread in our active Netflix (Nasdaq: NFLX) discussion board, cgski wondered if it wouldn't be cheaper for Blockbuster to acquire Netflix -- now marked down to an enterprise value of roughly $400 million -- as a way out of this margin-munching "fight to the death." In what earns my vote as the best "wish I had written it first" one-line reply of the week, AceInMySleeve offered up this brief yet meaty nugget: "Even better if you can spend 50 million more to knock the price tag down another 100 million."

Can Blockbuster really be that evil, cunning and brilliant? Let's think about it some more. Remember when Netflix got hammered back in October after it announced a price cut and Blockbuster followed suit a day later? It seemed to be just enough to keep Amazon (Nasdaq: AMZN) from jumping into the fray stateside.

Shares of Netflix bottomed out by month's end. The market started buying in, arriving at the same conclusion. The price war had entered a cease fire. Amazon turned its loaned disc attention overseas. The shares went on to appreciate by better than 30% by mid-December. What did Blockbuster do? Rather needlessly it triggered an even steeper price cut, dragging shares of Netflix back down in the process.

It's easy to see Blockbuster as a drowning company, flailing away with price cuts and deceptive late fee eradications as if it's the only way to survive. Yet maybe the company isn't taking in water? Maybe it's simply looking to build a lifeboat made of the body parts of its similarly submerged rivals.

You don't think it's possible? Blockbuster has already played the vulture when it waited for Hollywood Entertainment (Nasdaq: HLYW) to falter in its bid to go private before coming in with a lowball offer. Blockbuster would probably still be there, paying the violin player to string something grim, if Movie Gallery (Nasdaq: MOVI) didn't spoil the mood by coming in with a more reasonable offer for the country's second largest video rental chain.

When Viacom (NYSE: VIA) abandoned Blockbuster in a scorched earth move that involved Blockbuster taking on debt to pay out a hefty one-time dividend before it set it free, we grew to feel sorry for Blockbuster. Yet something tells me that the same company that played vulture with Hollywood Entertainment also knows how to play possum. 

Longtime Fool contributor Rick Munarriz can't remember the last time that he's had to pay a late fee on a movie rental. He does own shares in Netflix. He is a member of the Rule Breakers analytical team, seeking out tomorrow's great growth stocks today.