Novice Investing - Blockbuster Cuts Circuit City

Date: Thursday 28th 2008f August 2008 12:58:53 AM

Blockbuster Cuts Circuit City - 07/02/2008

By: Hari Wibowo

		Blockbuster Inc. 1201 Elm Street Dallas, TX 75270 United States

Finally, Blockbuster Inc. (BBI) has come to its sense. After two months of wrangling with Circuit City's management, Blockbuster finally withdraw its plan to acquire Circuit City. It reasoned that Circuit City sales has tumbled this year. (Which I think, should be apparent when they made that first bid). Blockbuster's strategy is to merge content such as games and movies with electronic devices, which was the original intention of the acquisition. With Circuit City reporting $ 320 Million loss on $ 11.7 Billon sales, Blockbuster felt that the merger of two losing companies will not benefit both. At the same time, Blockbuster announced that it will focus on the strategy within its own stores.

Now, Blockbuster needs to focus what is on hand. It is an ongoing problem that everyone is aware of. Since 2002, Blockbuster's revenue has stagnated at $ 5.48 Billion while archrival Netflix Inc. (NFLX) has seen its revenue grow from $ 152.8 Million to $ 1.21 Billion from 2002-2007. While Netflix still has to catch up a lot to collect $ 5.48 Billion worth of rental fee, please note that Netflix has a more efficient cost structure due to its online offering. As a result, Netflix can achieve consistent profitability while Blockbuster is barely profitable during the aforementioned period.

Blockbuster had tried hard to compete with Netflix through its online offering 'Total Access'. However, late last year, it was forced to raise its subscription fee in order to reduce losses. Apparently, Netflix still has the

economies of scale in the online rental world while Blockbuster is stuck with its high cost brick and mortar assets. It is in a bind right now. If Blockbuster tries to compete head on with Netflix online offering, it will sacrifice its huge brick and mortar customer base. Thus, at this moment, it can't kill Netflix because Blockbuster has a higher cost base.

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Blockbuster Inc. (BBI) or any other securities.

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