Blockbuster: A Hook in DISH's Eye

you fit into me
like a hook into an eye
a fish hook
an open eye

-- "You Fit into Me," Margaret Atwood, 1971

So the long and sordid saga of Blockbuster's (OTC BB: BLOAQ.PK) demise is winding down: DISH Network (Nasdaq: DISH  ) won an auction for the chain's assets, which was approved by a bankruptcy judge yesterday.

And by "won," I really mean "lost."

Requiem for a Dream
This is a heap of bad mojo for DISH in its struggle to eclipse -- or at least equal -- larger and richer rival DirecTV (Nasdaq: DTV  ) . Looking at the situation with a cheerfully optimistic eye, you'd see DISH spending $320 million for a company with an enterprise value of $831 million, writing off the expensive debt as part of the bankruptcy proceedings, and walking away with the following haul:

  • An established brand name.
  • About 1,700 physical store locations nationwide.
  • A finger in every video-rental pie, from DVD-by-mail subscriptions and strip-mall rental kiosks to pay-per-view digital streaming services.

So for the paltry sum of $320 million, DISH gets to enhance its own brand and services with whatever pieces of the Blockbuster puzzle it wants to keep around. The company could arguably challenge Netflix (Nasdaq: NFLX  ) in the digital rental space or Coinstar's (Nasdaq: CSTR  ) RedBox service in high-convenience physical rentals. And those Blockbuster stores suddenly became prime outlets for selling DISH subscriptions. That's the way DISH would like to spin the situation, of course.

That's nice. Wait here while I train the pink unicorns to do a conga line, just to shake out some gold coins from their lustrous rainbow manes.

Reality Bites
In reality, DISH isn't getting much for its money. The Blockbuster brand may be well-known, but "much-loved" would be a stretch. Are you any more likely to buy a DISH product if it came with a Blockbuster sticker on it? No, I didn't think so.

Those 1,700 stores are what remains after culling the massive global network of 5,600 stores Blockbuster had when filing for bankruptcy last summer and should represent the most profitable of the bunch. But that ain't saying much for a rental chain that has been the butt of biting jokes for half a decade. I'd be shocked if the Blockbuster stores add anything to DISH's bottom line as they look like a huge cost center.

And let's just say that Blockbuster's diversified strategy has been underwhelming so far. Out of the plethora of services offered up to the public, the most successful one seems to be the kiosk partnership with NCR (NYSE: NCR  ) -- in which NCR has cut deals that contradict Blockbuster's brand message to its customers and doesn't look terribly interested in what its partner has to say.

Naked Gun 33 1/3: The Final Insult
Last but certainly not least, DISH just bought a lot of bad karma with Blockbuster's content suppliers. The bankruptcy deal left many contracts with Hollywood studios underpaid, and 111 parties filed objections to the DISH sale before judge Burton Lifland overruled them all. News Corp. (NYSE: NWS  ) studio 20th Century Fox says Blockbuster owes it $20 million; Blockbuster says there's no debt to settle there. The goodwill isn't exactly flowing Blockbuster's way, folks. How do you expect an operation with this background to sign attractive content deals, if that's what DISH wanted to achieve?

All told, I think DISH might have been better off piling $320 million in crisp Franklins at the midfield of Cowboys Stadium, dousing it with gasoline, and dancing around the flames. That way, at least the cash-burning party would be over by the time the fire brigade arrives.

Want to see how DISH stewards the Blockbuster brand to new heights -- or to further flops? Add DISH to your watchlist by clicking here.

Fool contributor Anders Bylund owns shares of Netflix but holds no other position in any of the companies discussed here. Today's tribute to National Poetry Month was brought to you by the letter J and the number 0. Netflix is a Motley Fool Stock Advisor recommendation. Motley Fool Alpha LLC has bought puts on Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. You can check out Anders' holdings and a concise bio if you like, and The Motley Fool is investors writing for investors.


Read/Post Comments (8) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 08, 2011, at 10:56 AM, jhaw wrote:

    I would guess that the DISH executives spend a lot of time trying to figure out how to survive, let alone compete, against cable, DirecTV, video rentals, pay per view, and now streaming. As you correctly point out, Blockbuster gives them a presence in many of these areas without having to do it themselves from scratch. Unfortunately, Blockbuster failed miserably in all these areas except kiosk rentals, which is probably not a video delivery strategy for the long term. Buying Blockbuster is, in my opinion, a very bad idea for DISH, but it probably seems a lot easier to the DISH execs than trying to do it themselves.

  • Report this Comment On April 08, 2011, at 11:03 AM, watchwise wrote:

    Anders,

    At least you didn't use the terms,

    Debtor and Creditor in this article. Have you learned the difference yet?

    By the way, in the course of your flawed analysis of this "sale", did you bother to verify that according to the last monthly operating report filed by Blockbuster, they show approximately $ 100 million in cash?

    What about inventory? How much was that? DISH will pay how much? To acquire the following?

    Digital/VOD

    NCR licenses

    Store inventory

    International Operations

    1700 stores, possibly all cash positive

    $100 million in cash

    0 liabilities to any lenders

    If you ask me that sounds like a good deal, in fact, so good that it all has the stink of collusion. We'll see how it all shakes out.

    Now go back to your creative writing.

  • Report this Comment On April 08, 2011, at 12:05 PM, BuffettIII wrote:

    Anders Bylund:

    Please consider the following points:

    1. Despite its balance sheet struggles, Blockbuster had $4 billion in sales in 2009.

    2. Without about $1 billion in debt service to deal with, the company is actually fiscally solvent. The Viacom spinoff that created that debt was a fatal strategic error. Live and learn.

    3. Mr. Ergen just purchased the 28 day new release advantage. Restu assured Blockbuster on Demand via Dish is going to pummel the living hoo-hah out of Starz.

    4. Long term observers can see Blockbuster has almost reshaped itself from a brick and mortar operation into a digital streaming-kiosk operation.

    The retail locations fell from 9000 in 2004 to 1700 today. They have been replaced by about 10,000 Blockbuster Express kiosks. They also did it on a shoe-string, thanks to a partnership with NCR.

    Blockbuster on Demand teaming up with Dish is the next logical step.

    As Blue Ray players earn a bigger market share, digital streaming will give Netflix a run for their money. DVD by mail? Come on, man. The US Post Office is going broke.

    I don't know what Mr. Ergen is going to do exactly, but I'm pretty sure he's going to come out of this looking good.

    Blockbuster, new and improved, is going to live to see another day. Hopefully without Icahn on the scene, it will be a lot more customer friendly.

    Sincerely,

    Buffett III

  • Report this Comment On April 08, 2011, at 12:07 PM, gg2011 wrote:

    WOW everyone can see that you have a personal Vendetta against Blockbuster. You make an a-s-s of yourself every time you write about Blockbuster!

  • Report this Comment On April 08, 2011, at 12:09 PM, David369 wrote:

    I would think that if Blockbuster had 1700 stores with a higher percentage cash positive than not they wouldn't have gone on the auction block. The rest sounds good on paper but I wonder how it really works out. Didn't do the previous owners much good.

  • Report this Comment On April 08, 2011, at 1:54 PM, richleaves wrote:

    Wow this guy knows nothing about Dish Network. Ergen knows that the future is online, he's looking to the Future. Dish has been stocking up on streaming rights for a couple of years and building their tv everywhere service. Blockbuster gives Dish streaming rights that it needs to take tv everywhere the next step. They've bought up Hughs because again its all about online content. Can you view live tv on netflix? nope but you can on dishonline.com and most likely on blockbuster.com down the line.

  • Report this Comment On September 23, 2011, at 10:20 AM, markfenix wrote:

    I always enjoy coming back to your 'articles' months later as they always verify that the fool should probably have put an intern in charge of your commentary.

    As usual your treading water, just stand up, you're not in the deep end. Not only is BLOAQ on the rise, but the remaining assets including shares have proven viable. Penny stocks are always a gamble but Blockbuster has proven that its namesake still has value. I sunk $1000 into this stock a few days after your article posted and intend to hold on to my shares after today's big announcement from Dish.

    Prediction: by years end this stock will be well over .40/share. Maybe you'd like to get in on it.

  • Report this Comment On September 29, 2011, at 12:53 AM, Pandorabelle wrote:

    Ha! Markfenix ~ Closing @ .35 just 5 days after your post, we may be well over.40 by the end of the month...or maybe by the end of the day tomorrow!

    NFLX handed DISH and BB a gift with it's greedy price increase and division of services. No one listened when I railed months ago about the NFLX intentionally convoluted amortization numbers. Ah, well...see it came out in the wash after all.

    BLOAQ and BLOBQ are flying up massively daily...with the announcement of online streaming via a new tablet as of 10/1.

    Mr. Bylund, it appears that DISH had it right and demonstrate significant foresight, not to mention an eye for a bargain, and now you stand corrected.

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