Blockbuster's Game Theory

The game's afoot at Blockbuster (NYSE: BBI  ) .

The DVD rental giant is ramping up its presence in video-game retailing. The chain has always been an active renter of game titles in the past, but now its company-owned stores will begin selling a wider array of hardware, accessories, and software. The move should redefine its stores as a place for permanent purchases, rather than transient rentals.

Blockbuster has undoubtedly noticed what niche leader GameStop (NYSE: GME  ) has been able to accomplish in a much smaller footprint. Blockbuster will never achieve that kind of street cred among die-hard gamers, but it may as well try.

I like the move, but the tactical shift itself isn't a slam-dunk. Awhile ago, Hollywood Video was clearing space among its flick rentals to add Game Crazy video-game sections within its stores, and where did that take it? Blockbuster's nearest competitor wound up cashing out to Movie Gallery and is now wading through bankruptcy court.

Blockbuster has a better shot at making it work, in part because it's using its strengths as a shoehorn. For instance, the chain is now selling a PS3 package that bundles the 40-gig version of the console with a Blu-ray movie, a PS3 game, and a dozen free weekly Blu-ray or PS3 game rentals.

OK, so maybe Blockbuster needs to brush up on its price points. It is selling the system for $500, when the console, Transformers PS3 game, and Spider-Man Blu-ray disc can be bought for just $450 a la carte through (Nasdaq: AMZN  ) . If it can't price its subsequent rental packages as a free bonus, it's going to turn a tactical advantage into a pricing disadvantage. However, give Blockbuster a few months to get it right. It knows how important this is as a way to wean itself off the DVD-rental cash cow.

In a year or two, Blockbuster may resemble a smaller version of Hastings (Nasdaq: HAST  ) , the regional media-powered department store that sells everything from CDs to video games to consumer electronics beyond its DVD rental business. Even if Blockbuster is unsuccessful in its attempt to buy Circuit City (NYSE: CC  ) , expect Blockbuster to become more of an entertainment retailer than one that can be quickly bumped off once digital delivery becomes the celluloid standard.

"Blockbuster still rents movies, but that's just a small fraction of its business," I suggested recently in taking a glimpse at what Blockbuster may look like come 2010. "The chain has become more like a RadioShack (NYSE: RSH  ) , making the most of its small-box footprint as a Jack of all trades that specializes in media entertainment."

OK, so maybe I should have rolled with GameStop instead of RadioShack. Either way, Blockbuster is taking the right steps to build a stable of stallions before it has to retire its one-trick rental pony.

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