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Big Blue's Pursuit for Growth

19 Jan, 2005 By: Erik Gruenwedel

It seems I can't turn a page of Home Media Retailing without being reminded that the decline of video rental is due to sellthrough, the Internet, video-on-demand, common sense — in short, the 21st century.

Flat, or declining, same-store rentals at Blockbuster Video and Hollywood Video stores would appear to underscore the trend, or at least give credence to Big Blue's adamant pursuit of its perennial competitor.

Any public company not sustaining growth on a quarterly basis becomes a red flag to bullish investors. Eliminating late fees, as Blockbuster has been advertising, won't sit well with bulls — regardless of whether the TV spots would have you believe the move is some kind of “Les Mis?rables moment” for consumers.

So the next best thing is to acquire your competitor.

Most analysts applaud a Blockbuster-Hollywood merger. They say Big Blue will submit a superior bid to Movie Gallery's current $13.50-per-share cash offer.

There is little doubt, analysts say, that Blockbuster would shutter Hollywood's headquarters in Wilson-ville, Ore., in addition to thousands of duplicate storefronts.

“That's precisely why they should merge: to take out excess capacity in the industry,” said Arvind Bhatia, media analyst with Southwest Securities in Dallas. “Same-store sales have been on a decline. By taking out duplicating stores, you cut costs.”

I recently went to a Hollywood outlet to rent a video game. When I got home, I inserted the disc into my PS2 and watched my motorcycle-racing game skip just seconds after selecting my helmet color. Looking at the disc, I could see it had been used for things other than viewing. Scratches and gouges scarred the surface. The store let me replace the disc with another title. It, too, skipped after a few minutes. A nearby clerk at Game Crazy smiled and said I should buy new next time.

I then went to Blockbuster, repeated the aforementioned steps and had the same result.

Bottom line: Three rentals, three bad experiences.

This doesn't help matters.

Erik Gruenwedel's e-mail address is egruenwedel@advanstar.com.

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