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Dish Buys Blockbuster -- and Huge Leverage with the Studios

Bankrupt Blockbuster finally found a new home. Dish Network bought the beleaguered video rental chain at auction for $320 million, beating three other bidders, including Carl Icahn.

As of the last 10-Q that Blockbuster filed, which was for the quarter that ended October 3, 2010, base rental revenue for the first three quarters of last year was down 18.2 percent from 2009. The company was losing money like a Wall Street banker's complex derivative vehicle. So why buy it? In addition to the bland answers that appear in Dish's official rationalization, there is an unstated one: Blockbuster could play an important role in the online video wars.

Dish's explanation for the bid was what you might expect:

"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 for DISH Network," said Tom Cullen, executive vice president of Sales, Marketing and Programming for DISH Network. "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."
Having its own store locations could be useful in competing with DirecTV, especially as Best Buy seems to favor the latter:

But buying a money-losing venture for its promotion value doesn't seem too swift when its main line of business -- and way of attracting customers -- is dying. However, Blockbuster has something else that Dish wants: agreements with the movie studios permitting rentals and even sales via streaming over the Internet.

Furthermore, even though the DVD business is waning, studios are still addicted to the revenue they get for those disks. That gives Blockbuster's new owner some significant leverage in negotiating with the studios. That's critical to compete with the likes of Netflix, and it could give Dish an edge over DirecTV in an important line of business.


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