Still smarting from the worst quarter in company history, Dish Network is banking its revival in part on a video-rental chain that's an ice age removed from its mid-90s heyday.
How else to explain the satellite company's $320 million purchase of bankrupt Blockbuster on Tuesday?
“They’re just looking to carve up the carcass,” Carmi Levy, a technology analyst told TheWrap. “Blockbuster’s best days are behind it. This is not a successful business going forward.”
Nobody can fault Dish for trying to make a splash. It needed to do something after losing 156,000 of its 13.7 million subscribers in the fourth quarter of 2010, while its stock price has stubbornly refused to crack the $25-a-share mark.
In contrast, chief rival DirecTV added 289,000 subscribers over the same period, solidifying its position as the country's top satellite provider.
Analysts, however, are somewhat cool to the possibility that Dish can ward off challenges from not just DirecTV, but also multi-channel titans such as Netflix, by purchasing Blockbuster.
“I’m a little dubious,” Matthew Harrigan, an analyst at Wunderlich Securities, told TheWrap. “It may be better positioned to compete, but look at how well Blockbuster competed with Netflix in the past. Blockbuster is a pimple compared to what it used to be.”
The hope is that the purchase will help beef up Dish’s online video presence. Blockbuster may be closing stores at a head-spinning clip (down to 1,700 from over 3,400 last fall), but it does boast an infrastructure ready-made to stream movies and ship discs.
“It could be a piece of a more robust web-video offering that would include some elements of TV Everywhere, VOD and add streaming rights in the rental window. It's a ready-made package with a brand,” Christopher Marangi, an entertainment industry analyst at GAMCO, told TheWrap.
Not that the Blockbuster name isn’t dinged up after years of massive losses.
“They haven’t been dominating in even their core business, rental, in 18 months, some would argue two years,” the head of a studio home entertainment division told TheWrap.
Dish inherits a company that hemorrhaged money before succumbing to nearly $1 billion in debts and filing for Chapter 11 protection last fall. When Blockbuster finally pulled the plug, its revenues had already dropped 17 percent. They continued to fall roughly 28 percent a month as the company labored through bankruptcy.
“This is not a transformative acquisition by any means. But the deal still presents meaningful risk in that Blockbuster’s business is a rapidly melting ice cube, and it is entirely possible that it becomes a drain on cash flow going forward,” Craig Moffet, an analyst with Bernstein Research, wrote in a note.
Dish plans to keep many of Blockbuster’s stores open and use them to hawk its services, but as the home entertainment head acknowledged, many of those locations need to be freshened up. The cost of revitalizing the hundreds of dogeared stores now falls to Dish.
Moreover, it's not clear how willing studios will be to extend existing distribution pacts with Dish if it follows in Netflix's footsteps — after all, the moguls are no great fans of the flimsy profit margins they get from unlimited streaming.
“I think they’ll get themselves in a fight with studios,” Harrigan told TheWrap. “Movie makers are going to fight anything that further compromises the microeconomics of the studio model.”
Add to that the fact that Blockbuster has also fallen out of favor with many of the studios over unpaid bills, with Summit, Disney and Universal pushing to see the chain liquidated rather then resold so they could be paid. Suffice to say, Hollywood won’t be rolling out the welcome mat for Dish.
Of course, $320 million may prove a small price to pay if it provides Dish with the means to take a big bite of the mail-in DVD and streaming business.
However, there are dangers with harnessing one dying brand to a faltering one. In his note on the purchase, Moffet drew on the lessons of the recent past to reference Cablevision’s 2008 purchase of Newsday for $650 million. That ended in a write-down of the newspaper's value and losses in the hundreds of millions.
Dish should hope that its Blockbuster purchase doesn’t make a great double feature.