Blockbuster's Hollywood Ending

In an ending that would do Blockbuster's (NYSE: BBI  ) old "Go Home Happy" ad campaign proud, the battle for Hollywood Entertainment (Nasdaq: HLYW  ) is over and everyone is better off as a result.

It may not seem that way at first. Once Blockbuster announced that it was pulling out of the bidding, its stock fell by 6% on fears that a pairing of the country's two largest video rental chains would upset the competitive nature of the Federal Trade Commission's antitrust guidelines. Hollywood Entertainment also saw its stock fall, as Blockbuster had made a higher bid than Movie Gallery's (Nasdaq: MOVI  ) $13.25 per-share offer.

While only Movie Gallery saw its stock climb -- 22% higher, actually -- I think all three companies will be better off in the end. Blockbuster has too many distractions lately as it tries to grow its online business to battle market leader Netflix (Nasdaq: NFLX  ) without cannibalizing its stores. By promoting an in-store plan that offers just a third of the simultaneous disc rentals as its online subscription, one has to wonder exactly how it plans to do that.

While it may have been wrong for Hollywood to initially ignore Blockbuster's higher bid in favor of Movie Gallery's offer, it will find the best operating situation there. Movie Gallery, which has grown since the early 1990s by acquiring mostly rural mom-and-pop chains in a highly fragmented sector, will have its hands full in digesting Hollywood, but it will be a town-and-country pairing of two focused companies determined to make video and game rentals work offline.

While it's easy to envy Netflix's fast growth to 3 million subscribers and want a piece of that action, there is no point in competing against a price-war happy Blockbuster and the potential of Amazon (Nasdaq: AMZN  ) entering the online disc rental market.

The offline stores will evolve. They have little choice. While Movie Gallery has been buffered by its rural stronghold, which isn't in the overnight delivery areas of the online services, Hollywood has tried to grow its business by expanding its video game offerings in a dynamic "store within a store" format. Both companies will be able to capitalize on each other's strengths -- and Blockbuster will get to keep its balance sheet from being raided again.

Yes, they all get to go home happy, even if they aren't all exactly smiling about it right now.

Some recently rented headlines:

• Movie Gallery emerged victorious despite producing the lowest bid.
• Blockbuster already has to find a way to make its online and offline worlds gel.
• Maybe Blockbuster is just playing possum.

Longtime Fool contributor Rick Munarriz can't remember the last time that he stepped into a Blockbuster store. He owns shares in Netflix. The Fool has a disclosure policy. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.