Monday, April 14, 2008

Blockbuster's cash cow

Stuck in a declining business — storefront video rentals — Blockbuster today confirmed that it wants to buy another declining business. The nation’s largest video rental chain said today that it has offered $1-$1.35 billion cash for Circuit City, the country’s second largest electronics dealer. The news sent shares of Circuit City soaring.

The offer was made in February, but Circuit City has not cooperated with the friendly offer by opening its books. Until it does, Blockbuster can’t make a definitive offer.

This reminds me of a favorite b-school case on related diversification. Viacom merged with Blockbuster in 1994 to get the cash flow to finance its purchase of Paramount Pictures (and later CBS). After a decade, it noticed that video rentals were a declining business and thus decided to dump the shares via a share distribution.

If the idea of combining Blockbuster with Circuit City is an end-to-end contender for delivering digital movies (in competition with Netflix and Apple), Seeking Alpha suggests that Blockbuster doesn’t have a clue. Instead, writer Scott Berry suggests that Blockbuster will have to partner to get a top quality hardware solution to compete with either.

Open innovation — partnering for success — seems like such an obvious concept. Except to media moguls used to controlling the end-to-end value chain.

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