Apparently, the nose dive at Best Buy is accelerating. Watching retail just as a consumer over the last few decades, it seems that whenever a retailer starts going down the drain, they never recover. Calls are made for more visionary management to reposition the company, but I can't remember any such effort ever working. The slide may be fast - Circuit City, CompUSA, Borders - or slow - Sears, A&P - but the nose dive never seems to reverse. The only retailer I can possibly remember really executing a fairly large shift was maybe Gap from just being a Levi's outlet to whatever it is today. And maybe Radio Shack, which is sort of this zombie you think has been outdated for like three decades but keeps hanging on.
Posts tagged ‘Circuit City’
In my Forbes column this week, I publish an essay I wrote for an Americans for Prosperity event commemorating Milton Friedman's birthday. A brief excerpt:
Having once been successful through excellence, leading businesses typically get lazy and senescent, and become vulnerable to more innovative, lower-cost or more nimble new competitors. Sears lost its electronics sales to Circuit City, which in turn succumbed to Best Buy, which is now struggling to compete with Wal-Mart, who is being challenged by Amazon.com.
Unfortunately, businesses that were once successful can feel a sense of entitlement, believing that this new competition is somehow unfair, or that consumers are somehow misguided in taking their business elsewhere. When they have money or political connections, these businesses may run to Congress and beg for special protections against competition, or even new subsidies, mandates, stimulus projects, and bailouts.
Where is the threat to capitalism and individual liberty coming from today? Is it from some aggrieved proletariat, or is the threat from bailed out Wall Street firms, and AIG, and GM, and Chrysler, and ethanol manufacturers, and electric car makers, and windmill builders?
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?