Why Microsoft Should Buy Blockbuster (Seriously)
Blockbuster (BBI) is in stock market hot water again. The New York Stock Exchange (NYSE) notified the it that the video rental chain was out of compliance with the exchange's rules because Blockbuster had a market capitalization under $75 million over 30 trading days. Last fall Blockbuster share price dropped below $1 -- another NYSE no-no. Blockbuster management will cobble together a plan to show it can rectify the current situation within 18 months. I think instead the company should shop itself to Microsoft (MSFT).
On the surface, I know that sounds nuts. After all, Microsoft has never been in the video rental business and has always leveraged other retailers to sell software and hardware. But there are a number of reasons why it would fit in with what the company apparently wants to do, and it would offer some intriguing opportunities to get ahead of Google.
Last summer I thought that the concept of Microsoft opening retail stores was pretty amusing. After all, what would the company sell? Some Xbox 360s and enough packaged software to classify outlets as a new type of box store? It seemed clear that fueling the company's move was Apple (AAPL) retail envy. Apple is the king of retail selling with per-square-foot sales four to five times the size of Best Buy's.
However, things changed as Microsoft's product strategy became more obvious. The new Zune interface that came out last August showed a renewed interest in consumer electronics. Microsoft was already pushing hard on the Xbox front. Shortly after this, it seemed clear that the Zune could become a respectable front end for a handset to put up against the iPhone, and the new Microsoft stores could be a way to promote the Zune.
Now there's the Zune-based Windows Phone 7, with a Microsoft-branded phone apparently around the corner. Even more than before, Microsoft needs a way to promote these devices, as well as continue marketing game consoles.
What does Blockbuster offer? A number of things, starting with thousands of retail locations. Even though the company plans to shutter up to 760, that would still leave more than 6,000. Leases are in place and there's plenty of room. As of this moment, Blockbuster's market cap is under $53 million. For Microsoft, that's practically acquisition petty cash.
There are reasons other than the existence of retail locations that this might make sense. Microsoft wants to be big online. It could use Blockbuster as a way into download video rentals, combining the operations with Microsoft's own efforts in cloud computing, Bing, and other online properties. Imagine a search engine where you could get videos -- or, though some product expansion, music and e-books.
Supplementing the online operations would be in-store rentals. Why rent DVDs? Even though the chain is hurting, it still draws foot traffic, so Microsoft would get customers into the store and not even need a product loss-leader. Furthermore, Microsoft could offer kiosks to download music and e-books, or even some of the instant book printing machines to let people pick up paper books. Now it could combine media offerings (and, after all, software is just another type of specialized media) with Bing searches, and tie in the next generation through an even more elaborate online market for Xboxes. Or if Blockbuster seems like too much of a pain, there's always the hurting Borders (BGP) book, music, and video chain, which could be an even better fit at a $107 million market cap.
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