The next stage of Blockbuster's (NYSE: BBI) wooing of bricks-and-mortar challenger Hollywood Entertainment (Nasdaq: HLYW) has commenced. Today, news agencies spread the word that Blockbuster is willing to raise the price it is willing to pay for its rival. While investors bid up shares of both firms, I'm not sure I see the need for much enthusiasm.
Longtime Fool Bill Mann said it succinctly when Blockbuster's plans first came to light: This is merely about how much Blockbuster is willing to pay to get one rival out of its way.
Given the multitude of challenges that are facing the DVD rental industry right now, there's a certain degree of logic in Blockbuster's drive to narrow the playing field. This is especially true considering that many people are seeing Blockbuster's main differentiator as the fact that it can lure instant-gratification customers to its storefronts, as well as sweeten the deal by providing in-store coupons in tandem with its subscription service.
Even while the step to purchase Hollywood may be a logical one, it's hard to ignore that Blockbuster's last quarterly report included a blockbuster loss, as well, with new initiatives (read: spending) on the way and warnings of decreased profitability this year and next. Indeed, the money Blockbuster's throwing at its problems is with the expectation that it can win this war.
Of course, even if Blockbuster can buy itself an ally (while eliminating an enemy), there's plenty more competition for the DVD-watching masses. Not just Netflix (Nasdaq: NFLX) in the rental category and possibly, one day, Amazon.com (Nasdaq: AMZN), oh no.
There are also Wal-Mart (NYSE: WMT) and Costco (Nasdaq: COST) for us cheapskates, and shops such as Suncoast Video (an indirect part of Best Buy) or Tower Records. Indeed, you can toss a few DVDs into your handcart along with your books and music at Borders while you're holiday shopping.
Heck, even McDonald's (NYSE: MCD) got into the game last spring, setting up some kiosks for quick-serve new releases (a coveted area for Blockbuster and Hollywood, seeing how new releases are a big part of the instant-gratification crowd).
In the end, Blockbuster may very well prove that you can buy friends (especially if the price is right). However, there are plenty of reasons for investors to wonder whether Blockbuster's fixing to dig itself into a money pit.
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Alyce Lomax does not own shares of any of the companies mentioned, although she's a newcomer to the fold of Netflix subscribers.
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