Dish Wins Blockbuster Auction, Aims To Broaden Strategy

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By Steven Russolillo 
   Of DOW JONES NEWSWIRES 
 

NEW YORK (Dow Jones)--Dish Network Corp.'s (DISH) winning bid for Blockbuster Inc. (BLOAQ, BLOBQ) could put the satellite-TV provider on a path to compete with Netflix Inc. (NFLX), although significant hurdles remain.
Dish, based in Englewood, Colo., said Wednesday morning that it won a bankruptcy auction for the video-rental chain, offering $320.6 million for Blockbuster's assets. Dish plans to utilize the assets in order to enhance Dish's subscription offerings, leading some company observers to believe it could start streaming video and shipping DVDs.
However, any such move to imitate Netflix faces significant challenges, such as renewing studio deals, securing streaming rights and building out the needed infrastructure. For its part, Dish remains confident.
"With its more than 1,700 store locations, a highly recognizable brand and multiple methods of delivery, Blockbuster will complement our existing video offerings while presenting cross-marketing and service extension opportunities," said Tom Cullen, Dish's executive vice president of sales, marketing and programming.
"While Blockbuster's business faces significant challenges, we look forward to working with its employees to re-establish Blockbuster's brand as a leader in video entertainment," he said in a press release.
Dish declined to comment beyond Wednesday morning's statement.
Class A shares of Dish recently rose 11 cents to $24.42.
Dish--which beat out offers from billionaire investor Carl Icahn and several liquidators as well as a group of hedge funds led by Monarch Alternative Capital--expects to pay $228 million in cash after adjusting for items such as available cash and inventory. It sees the deal for Blockbuster closing in the second quarter.
Dish executives have acknowledged the challenges posed by the seemingly rising popularity of Netflix and other alternative video providers.
"My kids think I'm crazy for being in the pay TV business because they don't pay for TV," Dish Chief Executive Charlie Ergen said in November. He admitted it would be more efficient to spend $3 billion "starting Netflix" as opposed to launching satellites.
Netflix isn't worried about any increased competition. "We don't comment on other companies," said Steve Swasey, a Netflix spokesman. "We have always said that a big growing market always attracts competition. Netflix has been leading this big growing market since we started streaming in 2007."
Collins Stewart analyst Thomas Eagan said Dish's deal for Blockbuster titles and streaming rights appears intriguing, although there are some limitations. Blockbuster's studio deals are likely short term and may not be renewed, he cautioned. The company also doesn't appear to have a deep catalogue of streaming rights and may lack the infrastructure needed to properly distribute streaming titles, according to Eagan.
"But given Dish's difficulty at adding subscribers, this could provide a strategic lift," Eagan said.
The deal will likely be dilutive on most metrics in the near-term as Blockbuster barely breaks even on a cash flow basis, Eagan added.
"If Ergen's able to improve his competitive position by making Dish more attractive to become a subscriber, or creating value by becoming a Netflix competitor, the deal could be value accretive," Eagan said.
The Blockbuster deal follows Dish's recent agreement to buy satellite communications firm DBSD North America Inc. out of bankruptcy for about $1.4 billion.
Dish's recent strategy has centered on attracting more affluent customers who are willing to spend more each month on video and less likely to cancel their service. Previously, the company focused on targeting lower-end customers who were hit during the recession; however, it has recently raised monthly rates and pulled back on aggressive discounts and promotions.
The company's strategy shift has yielded mixed results. Dish has posted a 41% increase in its most recent quarterly profit, but it also reported a third-straight quarter of subscriber losses.
-By Steven Russolillo, Dow Jones Newswires; 212-416-2180; steven.russolillo@dowjones.com
--Matt Jarzemsky contributed to this report.