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Analyst: Blockbuster Got Movielink for Pennies

16 Aug, 2007 By: Erik Gruenwedel

Blockbuster Inc.'s desired entry into the electronic sellthrough business with the recent purchase of Movielink appears to have been an opportunity too good to pass up.

Dallas-based Blockbuster, in a regulatory filing last week, disclosed it paid just $6.6 million in cash for the download service started by the major studios in 2001 and once reportedly valued as high as $80 million.

By comparison, rival Netflix Inc. has stated it would spend more than $40 million this year developing its PC-based content-streaming service.

“Blockbuster just jumpstarted that for less money,” said Michael Pachter, analyst with Wedbush Morgan Securities in Los Angeles. “The studios recognize that they are never going to make any money on digital downloads, and they don't really have any interest in doing so.”

He said the studios know they have the power to keep digital downloads from developing while maintaining DVD sales as a big business.

“It is not collusion, DVDs are always going to be more profitable because they allow for an impulse purchase,” Pachter said. “There is no such thing as an impulse purchase of a download.”

In recent financial calls, studio executives have said the margins on electronic sellthrough of content exceed that of packaged media even while Apple reportedly takes a 35% cut on each iTunes download.

“The infrastructure is expensive to maintain, and most consumers don't know where to go to get a movie download,” Pachter said. “After I've seen Napoleon Dynamite in the theater, I'm not going to download it. I might buy the DVD on impulse at supermarket, though.”

He said the studios are counting on consumers buying five to 15 DVDs a year.

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