Blockbuster purchase creates options

Premium content from Denver Business Journal - by Greg Avery

May 13, 2011

Dish Network surprised many observers by emerging from nowhere to claim fallen video rental empire Blockbuster Inc. at an April 6 bankruptcy auction.

But for those inside the company, the deal capped more than a decade of interest.

That’s how long Douglas County-based Dish Network, the nation’s second-largest satellite TV company, has wanted to be in business with Blockbuster.

“You hang around the hoop long enough and something will bounce your way,” said Stanton Dodge, Dish Network’s general counsel.

Dish Network (Nasdaq: DISH) spent about $320 million buying Blockbuster after a crippling bankruptcy forced the Dallas-based company to close hundred of its stores. The deal closed April 26.

Eleven years ago, Dish Network tried to negotiate in-store promotion space and other marketing pacts with Blockbuster, but lost out when Blockbuster made a marketing partnership with its rival, El Segundo, Calif.-based DirecTV.

Buying Blockbuster became the most likely way for Dish to partner with the company. Doing so would’ve been more expensive during the years when Blockbuster dominated movie rentals.

But the cost wouldn’t necessarily have stopped Dish Network from weighing a deal.

Under the leadership of CEO and Chairman Charlie Ergen, Dish Network constantly is exploring mergers and acquisitions. Even when deals can’t be struck, there’s information and perspective to be gained, Dodge said.

“We’re not the kind of company where we assume we’re the smartest at everything,” Dodge said. “You learn something every time.”

What about the stores?

Since the bankruptcy auction in New York City, business and media press coverage has speculated about what Dish Network will do with Blockbuster’s 1,700 remaining stores, online movie-streaming business and automated rental kiosks found in big cities.

The satellite broadcaster’s executives sound confident a lot can and will be done.

Blockbuster’s bankruptcy put it into what Dodge called “a death spiral” — studios weren’t willing to offer it the hottest titles on credit, which meant fewer enticing titles to rent out — and that eroded Blockbuster’s business even more.

“We’re buying an asset that’s in need of resuscitation,” said Tom Cullen, executive vice president of Dish Network’s sales, marketing and programming. “... but Blockbuster is a powerful brand.”

Combining Blockbuster’s stores, online streaming, mail rentals and on-street kiosks with Dish Network’s satellite service gives the combined company more ways to get movies to viewers than any competitor.

Blockbuster again has money to reach movie-rights deals with the six biggest Hollywood studios.

On May 18, Dish Network will start offering new U.S. customers three months of Blockbuster’s DVD rental by mail, which normally costs $11.99 a month or more.

In large cities — where the major telecoms and cable companies dominate — the combination of Blockbuster stores, on-street kiosks and by-mail DVD rental could win business from consumers that Dish Network hasn’t attracted to satellite service.

Blockbuster has hundreds of stores in Great Britain and Mexico, where Dish Network doesn’t offer TV and where the DVD rental business has remained stronger than in the United States.

New hope for future follows purchase

Dish Network’s purchase rejuvenated Blockbuster store employees, who think the deal will reverse the brand’s decline, said Bryan Morrow, who manages Blockbuster stores nationwide.

“There’s a lot of passionate people in Dallas — people like me, who love blue and gold — and we’re excited to see this happen,” said Morrow, attending a May 6 Dish Network trade show in Denver. “The opportunity is amazing ... And it’s better than the alternative.”

The Blockbuster purchase came on the heels of Dish Network buying DBSD, a satellite company with valuable broadcast spectrum. That deal valued DBSD at $1.5 billion.

Earlier this year, Dish Network bought Denver-based Liberty Bell telecom for an undisclosed amount. Dish Network plans to start offering landline broadband services in Colorado through Liberty Bell next month.

EchoStar, Dish Network’s sister company, is buying Germantown, Md.-based Hughes Communications in a transaction worth $2 billion. Hughes provides thousands of rural households with satellite Internet access and manages payment transactions for thousands of businesses via satellite.

Ergen, co-founder and chairman of both Dish and EchoStar, recently likened his company’s strategy to the TV comedy “Seinfeld.”

The show had multiple story lines running in parallel until late in the show, then they all came together and made sense. His companies’ acquisitions should be viewed that way, too, Ergen suggested.

Cullen echoes that, saying it’s too soon to know exactly how Blockbuster and the new pieces of Dish Network will work together.

“We’re in minute four of this episode,” Cullen said.

Dish Network is trying to stay ahead of consumers’ changing media consumption, which is “clearly a march toward more digital and wireless technologies,” he said.

With Ergen being Dish Network’s controlling shareholder, the company is run with a long-term vision, not emphasizing quarterly financial results that satisfy Wall Street, Cullen said.

“Fortunately, we’re financially strong,” Cullen said. “We’re placing some bets on where we think [the market] is going to be. We want to be here in 10, 15 years.”