Really This Much Value Left?

Dish Network is going to buy Blockbuster out of bankruptcy for $320 million.  I am frankly floored there is that much value.  I have found that one can make a surprising amount of money riding an obsolete business down over the years if it is managed correctly -- but this is generally for product businesses.  Retail businesses are really hard to ride down because you need to be closing stores every year and that is hard to do cost-effectively given typical lease terms.  Never-the-less, I expected the winning bid to be from a liquidation company, someone like the folks who took wound down Circuit City.

But the purchase by Dish Network implies that the buyer wants to continue operating Blockbuster in some form, and the identity of the buyer implies some sort of on-demand or streaming service.  But what does Blockbuster offer?  Is the brand valuable in this context, or a liability?   Does it have customer loyalty with a segment (old people?) who have so far shied away from Netflix / Hulu?  Does Blockbuster have favorable royalty / licensing contracts with studios that are transferable to other video delivery models?

If I had to guess, I would bet on the latter.  There have been examples of whole businesses built from legacy contracts.   One of the best examples is a little noticed contract Carl Icahn had with TWA, which spawned a huge new travel agency and later really helped to build Priceline.com.  Here was the story:

When TWA got a loan from Carl Icahn, an almost unnoticed part of the deal was that a certain travel agency owned by Icahn, small at the time, would be guaranteed TWA tickets at a healthy discount off the lowest published fares.  This agency, with this boondoggle, grew to enormous size as Lowestfare.com.  TWA, beyond the reasons listed above, therefore had a second reason for not wanting to publish their lowest possible fare.  Normal limitations that most airlines could set on how many seats would be available at their lowest fare could not be enforced by TWA.  If they offered a new $100 fare, Lowestfare.com could blow out an unlimited number of tickets at $80 or less and TWA would have to accept it.  Therefore, by offering discounts unpublished via Priceline, TWA prevented the travel agency from getting inventory even cheaper.  And so, a huge portion of the early Priceline inventory was TWA.  (ironically, after the American Airlines acquisition of TWA killed the deal, the Lowestfare.com URL was bought by … Priceline.

I wonder if Blockbuster has something of similar value in their royalty / licensing agreements?

  • http://evilredscandi.blogspot.com Evil Red Scandi

    Someone forwarded me an article on this that described Dish's bid as "winning." If this is "winning," Dish must have Charlie Sheen on its board... and it would still be stupid, because if that was the case the money would still have been better spent on hookers and cocaine.

  • marco73

    Well, $320 million would cover a lot of hookers and cocaine.

  • http://www.medicalpowerattorney.com medical

    Often there are businesses that seem obsolete but they aren't. It might be the one also.

  • MGW

    Keep in mind that Blockbuster is also a Franchisor. I suspect that in certain markets, they have franchisees that are still surviving, which means that they likely still have royalty streams coming in. Even if they pulled the plug on all corporate stores, there could still be some value here.

    Also, bankruptcy allows them to reject all leases and renegoiate term and price. What really makes retail difficult is fixed costs and there is no bigger fixed cost than occupancy. If they could negotiate favorable rent concessions (and think about how many vacant strip malls there are out there), they could keep the business alive long enough to milk some money.

    Finally, I suspect that there are some sort of favorable contracts with the major studios. I don't pretend to know what those are, but I'm sure that they are of some value.

  • IgotBupkis, President, United Anarchist Society

    Maybe DISH wants to leverage its bets and be able to provide a NetFLIX style delivery service to complement its on-demand abilities.

    In that event, the purchasing contracts that Blockbuster virtually has to have would be quite useful, as they almost have to be some of the best terms available in the business. In other words, I think Warren is correct about the legacy contract matter.

  • IgotBupkis, President, United Anarchist Society

    Blockbuster, as I recall, saw one possible mechanism for its demise over a decade ago, and wanted to switch to a "kiosk model" (something like a Red Box, but using burners and color printing to create discs/boxes on demand, allowing for a much larger "inventory" en situ).

    They never could get the studios fully on-board with allowing their package-control form of copyrights to be sub-leased.

    It's possible BB could have some relevant patents obtained under that idea which might be relevant to something Dish is doing or has planned, I would think.

  • anon

    Agree with you, Coyote. It's gotta be the licensing deals with the studios.

    That's the big battle Netflix is causing and fighting right now. Dish (and cable, etc) also provide broadband, which would obsolete the actual TV stations if Netflix had licenses to every single TV show and movie.

    In other words, why would you pay $100 for all those channels when your $50 broadband connection has everything via Netflix? Dish/cable would lose some serious revenue....

  • Hasdrubal

    If you look at Blockbuster's website, they are doing some on demand video delivery and maybe DVDs-via-mail Netflix style. Also, Direct TV has started advertising on demand movies and TV shows now as well. So I'm thinking it's likely legacy contracts and maybe some infrastructure.

  • http://www.ianrandom.com Ian Random

    Part of me really loves the rental stores going bankrupt, since they were based primary on late fees. Ever wonder why you couldn't check in movies yourself? I hate those stupid calls a week later inquiring about the movie and having to tell the !@#$$ to check the shelves. I did enjoy walking over to look around with my wife.