Bloomberg News

Blockbuster Hits Rewind on Plan to Return as Netflix Killer

October 05, 2012

Dish’s Ergen Scraps Blockbuster Plans After Wireless Delays

When Charlie Ergen’s Dish Network Corp. acquired Blockbuster out of bankruptcy in April 2011, Ergen planned to use the stores to sell Dish mobile devices that could be used to stream Blockbuster movies. Photographer: Andrew Harrer/Bloomberg

Billionaire Charlie Ergen is giving up on his plan to turn the once-mighty Blockbuster LLC video- store chain into a Netflix (NFLX:US) Inc. competitor and gadget retailer.

When Ergen’s Dish Network Corp. (DISH:US) acquired Blockbuster out of bankruptcy in April 2011, Ergen planned to use the stores to sell Dish mobile devices that could be used to stream Blockbuster movies. The plans broke down when U.S. regulators didn’t immediately approve a waiver allowing Dish to use its satellite spectrum for terrestrial data and voice transmission.

“You make a lot of mistakes in business,” Ergen, Dish’s founder and chairman, said in an Oct. 3 interview. “I don’t think Blockbuster is going to be a mistake, but it’s unclear if that’s going to be a transformative decision.”

Dish has begun the process of closing stores that no longer make strategic sense, a plan that will allow Dish to turn a profit on the $320 million acquisition, Ergen said. Some Blockbuster DVD-rental stores can still make money in rural regions, he said. About 900 U.S. stores remained as of August, a fraction of the thousands Blockbuster once operated.

Ergen’s plans for Blockbuster turned sour when the regulatory approval process for his radio-wave licenses took longer than expected. Ergen said he believed the government would approve Dish’s plan in 2011 as it had done for Philip Falcone’s LightSquared Inc., which was also attempting to build a new long-term evolution network.

FCC Decision

The government later denied Falcone use of his spectrum due to global-positioning systems interference concerns, causing LightSquared to file for bankruptcy. To avoid a similar outcome with Dish, the government slowed down the approval process for the Englewood, Colorado-based company, which is still waiting for the results of the Federal Communications Commission’s rulemaking.

Ergen’s airwaves, which Dish agreed last year to purchase from DBSD North America Inc. and TerreStar Networks Inc. for about $3 billion, require new handset devices with a chip that links the satellite spectrum to terrestrial towers. The government’s delay has caused Ergen to change his mind about selling those products in Blockbuster stores.

“When your lease runs out on the stores, you can’t re-up because you can’t make enough money from just selling DVDs,” Ergen said.

Profitable Purchase

When Dish acquired Blockbuster last year, the company had about $100 million in cash on the balance sheet. Shuttering and selling all 1,700 Blockbuster stores that Dish purchased would make Ergen’s company about $300 million, turning Dish a profit without using the brand for anything, Ergen said. Dish announced plans in February to shutter 500 stores, bringing its U.S. total to about 900 through August.

“There was very little risk in buying,” Ergen said. “Worst case we break even or make a little bit of money.”

Dish fell 0.5 percent to $32.12 at the close in New York. It has climbed 29 percent in the past year.

Blockbuster was once so dominant in the home-video market that it was sued by independent video retailers, who claimed in a 2001 lawsuit that the company’s revenue-sharing agreements with movie studios hurt competition. The suit was later dismissed.

By the time Viacom Inc. (VIAB:US) spun off Blockbuster in 2004, Netflix was eating into the retailer’s customer base with its postal DVD rentals. Blockbuster was operating about 9,000 stores worldwide then. It filed for bankruptcy protection in September 2010.

Netflix Clone

Dish planned to entice consumers to buy its wireless services by streaming Blockbuster movies on mobile devices. Without the wireless network, a nationwide streaming service would function a lot like Netflix, except Blockbuster would be starting from scratch against a big incumbent, Ergen said. Netflix has 24 million U.S. streaming-video customers.

Content providers have caught on to Netflix’s business model, Ergen said, after years of struggling to figure it out. Netflix pays a flat fee for the rights to stream library content. When the Los Gatos, California-company was growing rapidly, Netflix was profitable because the company would pay a fee based on the customers it had at the time, then make money by recruiting millions more customers, Ergen said.

Going ‘Pfft’

“Netflix at first paid for 5 million customers and they got 25 million,” Ergen said. “But now people are saying, ‘OK, you’re going to get 30 million customers, so you’re going to pay for 30.’ If Netflix can get 40 or 50 million, they’ll be fine. But if they don’t get to 30, they’re probably going to go pfft.”

Netflix shares have fallen 44 percent in the past 12 months. Analysts predict (NFLX:US) Netflix will lose money this quarter and next, according to data compiled by Bloomberg.

Joris Evers, a Netflix spokesman, declined to comment.

Dish no longer has plans to use Blockbuster as a nationwide video streaming or DVD-by-mail service, Ergen said.

Dish also considered a deal with Coinstar Inc. (CSTR:US)’s Redbox, allowing customers to rent a movie from a Redbox kiosk and return it to a Blockbuster store, Ergen said. Those plans deteriorated when Verizon Communications Inc. (VZ:US) announced its partnership with Coinstar earlier this year.

Dish has combined the Blockbuster brand with its own offerings by giving customers a “Blockbuster @Home” option, formerly Blockbuster Movie Pass, which allows subscribers to rent DVDs and video games by mail, stream more than 25,000 movies to personal computers and watch more than 3,000 titles at home on television. The package costs $10 a month and is free for the first three months to new customers.

The company has other plans for Blockbuster on which Ergen declined to comment. Dish has spent “a lot of time” talking with cable networks about an Internet streaming service for live programming, although the service is probably still “years away,” Ergen said.

“Worst case, we’ll take our money after having wasted some time, not much money, and life goes on,” Ergen said.

To contact the reporter on this story: Alex Sherman in New York at asherman6@bloomberg.net

To contact the editor responsible for this story: Nick Turner at nturner7@bloomberg.net


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Companies Mentioned

  • NFLX
    (Netflix Inc)
    • $438.8 USD
    • -12.38
    • -2.82%
  • DISH
    (DISH Network Corp)
    • $63.6 USD
    • -0.98
    • -1.54%
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