Dish Network, Blockbuster Merger: Can They Really Compete? (BLOAQ, DISH, NFLX, DTV)

The acquisition of Blockbuster (BLOAQ) by Dish Network DISH is an interesting deal that deserves a little more attention. Dish Network emerged last week as the winner of a bankruptcy auction of ailing movie rental chain Blockbuster. After filing for Chapter 11 bankruptcy in September, Blockbuster put itself on the market in an auction that took place last week. Blockbuster is the second acquisition that Dish has made recently following its recent purchase of DBSD North America. It looks like Dish is willing to go after distressed assets at bargain prices to strengthen its own portfolio, which can possibly open up more strategic alternatives longer term. This comes with the risk that it overextends itself, and brings increasing pressure from competitors Netflix NFLX and DIRECTV DTV. Dish Network expressed the following in its press release: DISH Network Corporation DISH announced that it was selected as the winning bidder in the bankruptcy court auction for substantially all of the assets of Blockbuster, Inc. DISH Network's winning bid was valued at approximately $320 million. After certain adjustments are made at closing of the transaction, including adjustments for available cash and inventory, DISH Network expects to pay approximately $228 million in cash to acquire Blockbuster at the closing which is expected to occur in the second quarter of 2011. Implications for Dish Clearly, the company aims to become more competitive in the pay-TV market. Currently, Dish is facing threats on several fronts. These include the increasing popularity of fiber-optic pay-TV services from companies like AT&T and Verizon, a lack of bundled offering that consumers tend to prefer, and its closest competitor DirecTV is thriving and winning new customers on a net basis while Dish has struggled in the recent past. But now that Dish owns the video retailer, what does it actually plan on doing with it? The Wall Street Journal reports that their plan involves leveraging the chain's 1,700 brick and mortar locations for signing up new satellite customers. "Satellite-television billionaire Charles Ergen has expressed interest in using some Blockbuster stores to sell subscriptions to its service," the Journal reports. "Dish also is interested in possible synergies from Blockbuster's on-demand business." The company vowed to reestablish “Blockbuster's brand as a leader in video entertainment." While it is unclear how Dish will operate Blockbuster's stores, it certainly makes sense for the company to replace them either with a streaming service or with a combination of streaming and kiosks. Does Dish have enough bandwidth to deliver such streaming service at large scale over the Internet? This is where the acquisition of DBSD comes in, which gives Dish access to additional spectrum thereby making it possible for the company to potentially develop a wireless network in the future to support data. Increased Competition for Netflix? Blockbuster should now gain an improved focus and with the backing of a large satellite pay-TV provider in Dish Network. With Dish's support, Blockbuster will have enough capital and buying power to acquire streaming content at better terms, which could help push up the content acquisition costs for Netflix and others in the industry. But can the company pull it off? Tech blogger Dave Zatz echoed the confusion of a number of financial observers in a tweet "Dish Network wins Blockbuster auction for $228 million in cash... Does not compute." Adding more skepticism is Mike Fleming at Deadline New York who can't see why Dish Network is paying anything at all for the "floundering" chain. "With the $1 Redbox option available in kiosks at every supermarket, and Netflix's painless streaming program and mail rental system, can anyone remember the last time they even stepped foot in a Blockbuster store?" he asks. "Blockbuster's brick and mortar strategy was exposed as a dinosaur strategy when those other services began to rise, and the behemoth moved too slowly to adapt to the times and protect its turf." Thus far, it appears the market is still assessing the merits of this transaction as the stock price has remained relatively stable. However on a longer term basis, investors should be careful. How the company develops and implements its strategic plan will have a significant impact on whether it can successfully gain market share in this industry.