What Dish Network Could Do With Blockbuster

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Analysts say the video rental company would give the satellite TV firm more options in the online video space, including the chance to launch a Netflix-type service, but one analyst warns that Blockbuster could become a financial burden.

NEW YORK - Satellite TV operator Dish Network's proposed $320 million acquisition of video rental company Blockbuster, if approved, will allow the company to expand its on-demand and online content offerings or even launch a Netflix competitor, according to analysts.

While some highlighted the small purchase price and potential benefits, at least one analyst, Sanford C. Bernstein's Craig Moffett, called the deal "strategically puzzling" and questioned whether Blockbuster's deteriorating financial performance may become a financial burden for Dish. "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," he said, adding that "the business is in a tailspin."

A bankruptcy judge must still formally approve the deal on Thursday, but Wall Street analysts started discussing potential fallout on Wednesday.

The stocks of acquirors often take hits as investors worry about execution risks and high price tags. However, in Wednesday trading, Dish shares closed slightly higher at $24.32, near a recent 52-week high of $24.76. It was a possible sign that investors felt no major acquisition problems would come into play in this case. But the lack of a real stock reaction may have also signaled a lack of conviction that the deal would be a major game changer for Dish in either direction.

Observers mentioned future relations with Hollywood studios as one of the key challenges that Blockbuster under its new owner will have to deal with, and those relations will be one factor that influences how the company does down the line. 

"We find the idea of gaining access to the Blockbuster titles and streaming rights intriguing" for Dish, Collins Stewart analyst Thomas Eagan said in a more bullish report.

He cited at least two possible Dish strategies for the Blockbuster content. One is "using the DVDs and rights to make Dish more competitive (versus, say, DirecTV) by offering free DVD and streaming with a new Dish subscription," Eagan said. The other is "creating another Netflix-type provider."

However, Eagan also cautioned that there would be limitations to those strategies.

"The studio deals with Blockbuster are likely to be short-termed and may not be renewed," he said. "The streaming rights are likely shallow in terms of number of titles; and Dish may lack the fulfillment infrastructure needed to distribute the titles."

Observers suggested that Dish could bring together Blockbuster's online offering and its DishOnline.com online video platform, for which it has been striking content deals, most recently in an agreement this week that covers movies from premium TV service Epix, a joint venture of Viacom, MGM and Lionsgate. Some predict that Dish could use the Blockbuster name for its online service in the future.

In announcing it had won an auction for Blockbuster, Dish early on Wednesday cited cross-marketing and service extension opportunities without going into details. A spokesman declined further comment.
"The most valuable 'extension opportunity' for Dish lies within Blockbuster's digital business, which rents movies to customers on an a la carte basis through the Internet similar to Netflix, and content rights, which Dish could use to start a robust on-demand library," echoed Wells Fargo analyst Marci Ryvicker who had last week suggested Dish could look to compete with Netflix.

She said the deal is another hint that CEO Charlie Ergen "is setting Dish up to provide (some) content via server/Internet versus satellite." 

Her conclusion was more bullish than comments from others. "We view the acquisition as a positive that provides Dish with an Internet content platform and delivery method, a content library and greater optionality at a manageable cost," she said.

Moffett also called an online play the biggest possibility for Dish in the deal. He highlighted Blockbuster's online service, which "has been a bit of a dud, but which might somehow be used to augment Dish's Slingbox service." But the analyst also said that "the vast majority of Dish Network subscribers who do have broadband service use DSL, which is ill-suited to delivering a quality streaming video experience."

Meanwhile, among potential cross-marketing opportunities, observers mentioned the possibility to sell Dish subscriptions in video rental stores. Some have their doubts though that this would work smoothly. "Fair enough," said Moffett. "But we find it difficult to imagine Blockbuster's rapidly shrinking store base becoming a source of significant incremental gross additions for the core Dish Network pay TV service, both for logistical reasons (employee training, support infrastructure) and the incongruence of the sale process ("Would you like a satellite dish with your rental?")."

Analysts also discussed the purely financial impact of the Blockbuster deal. "We do not view the acquisition as being significant to Dish's finances," said Ryvicker.

Eagan warned though that there will likely be earnings dilution. "But given Dish's [recent] difficulty at adding subscribers, this [deal] could provide a strategic lift," he concluded.

Overall, Ergen's "grand plan is unclear" at this stage after the Dish auction and a recent $1 billion deal for a broadband provider, concluded Moffett. "But what does seem clear is that he is trying to fortify his business empire against the long term risk of competitive foreclosure."