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Trying to Make Sense of Blockbuster's Bid for Hollywood

18 Nov, 2004 By: Thomas K. Arnold

A week after it was announced, Blockbuster's pitch to buy Hollywood Entertainment Corp. still has lots of us scratching our heads.

Common business sense dictates that in a vibrant, growing business, you do what you can to stomp on the competition, particularly a strong competitor. If the competition is really good, or at least has lots of good locations, you buy it out.

But video rental, which — efforts to the contrary aside — continues to be both Blockbuster and Hollywood's primary business, is hardly a thriving business. For several years, in the face of consumers' continued shift toward buying movies, video rental has held flat; this year, it's been going down at an alarming clip.

Even when you throw in subscriptions, consumers are spending less, not more, money on renting movies. The business may not be going away completely, but it is trending downward — and my hunch is that future shrinkage will affect the big cookie-cutter chains more than the independents.

So why buy Hollywood, at a time like this? You can go back to the location argument. Hollywood certainly has lots of great locations, and many of them happen to be very close to Blockbuster locations — too close for comfort, you might say. Buying up Hollywood would let Blockbuster eliminate many competing stores and take over the ones that are cleaning up.

But neither Blockbuster nor Hollywood are cleaning up — and further clouding the whole issue is that Blockbuster isn't looking for a fire sale. Indeed, its offer of $11.50 a share is 12 percent more than a group of investors was planning to pay in a deal to take Hollywood private.

Indeed, I have to agree with the Netflix spokesman who told Video Store Magazine senior editor Holly J. Wagner, “We look at this as one money-losing business buying another.”

Only two scenarios make sense. One is that Blockbuster needs to show growth to please shareholders, and since organic growth isn't likely in the current business environment, buying up the competition is really the only other option. This also explains why Blockbuster seems to be stepping up its acquisition activities, which include the purchase of 11-store Video Hut, a chain typical of the regional powerhouses — most of which carry adult — that Blockbuster was buying in the late 1990s.

The other scenario is that Blockbuster needs stores, lots and lots of stores, for something else. Remember, Blockbuster has been trying to break out of its video rental mold for years, beginning with an ill-fated attempt to focus more on sellthrough way back in the early 1990s, before there really was any viable sellthrough business to speak of. The DirecTV satellite deal, the Enron debacle — these were all attempts to move above and beyond the rental business.

One suggestion is that Blockbuster is after the 600 Game Crazy outlets that Hollywood operates. Still, $1 billion — the price tag Blockbuster put on its offer, including debt assumption — is an awful steep price to pay solely for these games stores, no matter how much promise Blockbuster sees in them.

Or maybe the trading business has a lot more potential for growth than anyone thinks.

In any event, it looks as though the suits at Blockbuster just might have something up their sleeves.

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