Blockbuster: A video relic or Dish Network’s new secret weapon against Netflix?

Charlie Ergen, chief executive of Dish Network, is a gambling man.

Before selling satellite dishes out of a truck with his wife, Candy, 30 years ago, he tried his hand at professional blackjack in Las Vegas. Now the outspoken billionaire appears to be placing one of his biggest bets yet: on Internet video.

Video

April 6 (Bloomberg) -- Dish Network Corp. won an auction for bankrupt Blockbuster Inc.'s movie-rental business with a $320 million bid that beat offers from Carl Icahn and other investors.

April 6 (Bloomberg) -- Dish Network Corp. won an auction for bankrupt Blockbuster Inc.'s movie-rental business with a $320 million bid that beat offers from Carl Icahn and other investors.

More on this Story

View all Items in this Story

This month, Dish bought Blockbuster off the auction block for $320 million. The move was as puzzling to industry watchers as it was intriguing. Blockbuster, the brick-and-mortar video chain, had been knocked flat by Internet companies such as Netflix that were quicker to move from DVD rentals to streaming movies online.

It was a tale of fast-shifting fortunes: Blockbuster’s stock was delisted from the New York Stock Exchange this past summer, and it filed for Chapter 11 bankruptcy protection — a steep falloff for a company that was worth $1.6 billion in 2002. Netflix, by contrast, has built a market capitalization of $13 billion — up from $288 million in 2002 — and now streams content to more than 200 devices.

Customers may have moved on from Blockbuster, but Ergen sees promise. He notes that Blockbuster has valuable streaming technology. Still, Dish has emphasized plans to use 500 of the video chain’s 1,700 retail stores to sell its subscriptions and TV set-top boxes.

Industry insiders, however, are calling his bluff. Ergen, chairman of Dish and its sister company, EchoStar, must be dreaming bigger, they say.

“Charlie Ergen has made a lot of money by being contrarian and taking bets,” Liberty Media chief executive Greg Maffei said in an interview. “I think he’s going to take Blockbuster, stabilize the business, move to streaming and push Dish subscriptions overall. The key will be to leverage his businesses.”

Blockbuster has a vast library of movies and shows and the licensing rights to stream them over the Web. That’s valuable content for Dish and EchoStar, which have snapped up airwaves — broadcast and satellite — in recent years that allow the companies to offer broadband Internet access to subscribers.

Dish, with a value of $10.7 billion, has 14 million customers. Its rival DirecTV has 19 million. But Ergen has said he is restless and ready to shift the business to respond to new competition from the Internet. With a war chest of $3 billion, he has made a series of quiet acquisitions, many on the cheap, analysts said.

In 2007, Dish and EchoStar spent $380 million on Sling Media, a video player application for the iPhone and other devices. In 2008, Dish and EchoStar separated, and Dish bought $700 million in mobile Internet airwaves at auction from the Federal Communications Commission.

This year, Dish spent $1 billion on DBSD, a firm with satellite spectrum that can be used for mobile broadband Internet access. EchoStar bought Move Networks, a streaming-video company, and announced its intent to buy Hughes Communications, a satellite firm with spectrum that can also be used for high-speed Internet networks.

A reborn Blockbuster?

And now, Blockbuster. If it is Dish’s hand to play against Netflix, it’s a modest wager compared with investments made by other firms. But the biggest question is whether Ergen can make something of a company that is business school case study for failure.

Observers say Blockbuster could do better under different management. In an article in the Harvard Business Review, former Blockbuster chief executive John Antioco said the business was held back by squabbling between former parent company Viacom’s shareholders and management over the company’s online strategy.

Viacom didn’t want to put its movies and television shows online; it was making more money from theaters, DVD sales and licensing fees with cable companies. While Blockbuster shareholders spent precious time debating the merits of late fees for video rentals and retail store tie-ups with companies such as Barnes & Noble, Netflix was renting videos online and building the technology to stream video over game consoles, laptops and mobile phones. And Redbox was offering cheaper rentals at grocery stores.

“I firmly believe that if our online strategy had not been essentially abandoned, Blockbuster Online would have 10 million subscribers today,” Antioco said, “and we’d be rivaling Netflix for the leadership position in the Internet downloading business.”

Blockbuster has licensing deals with 20th Century Fox, Lionsgate, MGM, Sony Pictures and Universal. Films from those Hollywood studios can stream to Blockbuster customers on smartphones, tablets, laptops and televisions.

“Dish’s move to buy Blockbuster is super-smart because it’s all about getting those licenses for content,” said Markham Erickson, a tech industry lobbyist for the law firm Holch & Erickson. “Dish is a company that realizes you can’t stop moving or you’ll be passed.”

Of course, Dish is in a footrace with Netflix, Hulu and YouTube to get into American homes. And Netflix, for one, seems a step ahead.

The network effects of Netflix’s success may be one of the biggest challenges for any serious competitor. The more customers the company gains, the more influence it has over the industry and the more relevant its service, a perfect business swirl that keeps leaders out front, particularly in the tech industry.

It explains Facebook’s success, for instance. You wouldn’t want to be off on some other social network when all your friends are yukking it up on Facebook.

Others discount the notion. Internet users are fickle, analysts say. They are one click away from using new services. Netflix has more than 20 million subscribers, but with 120 million homes in the United States, the opportunity is ripe to attract customers who will choose more than one Internet service for entertainment.

The payoff to Dish’s gamble, in other words, could be substantial. Ergen, a straight-shooting Tennessee native, has been candid about the prospects of his industry.

“I worry about what we’re going to look like five years from now and not what we’re going to look like five quarters from now,” Ergen said in an earnings call with analysts in February. “Our industry is changing . . . so we have to be ready to adapt to that. And sometimes I’d rather be on the early end of trying to adapt than the back end.”

Dish is making key moves even as the communications industry reboots. As consumers go online for entertainment and news, companies are scrambling to change and break into new businesses. The cable firm Cox recently added wireless services, and Comcast is making itself over into a media giant by buying NBC Universal’s networks and a movie studio. Verizon bundles wireless, phone, television and broadband to more and more American homes.

AT&T is also fortifying its position with a bid to buy T-Mobile for $39 billion, an attempt to create the nation’s most robust network for video and other services over smartphones and tablets.

A familiar underdog

Ergen comes to the moment, as usual, as an underdog. And the company will need to draw from its grit. Ergen’s never been shy about taking risks. He’s taken on cable, Hollywood and electronics giants — in the market and in court.

With co-founder James DeFranco, Ergen built Dish, first known as EchoSphere, by delivering satellite dishes to homes and businesses in rural Colorado for $15,000. They would cut customers a break on the installation fee if they could spend the night. Soon, they had installed 1 million large dishes and taken a bigger gamble, launching their own satellite in 1995 and providing satellite service.

It was expensive, and they had formidable competition. Broadcasters and cable companies dominated access to American living rooms.

They got licenses from the FCC, and new communications laws in 1992 required cable companies to share programs with satellite providers, an important milestone for the industry. DirecTV and Dish became the low-cost alternative to cable companies and began snapping up customers, particularly in rural areas.

Now Dish takes on new competitors even as it deals with existing challenges.

In the company’s annual filing to the Securities and Exchange Commission, Dish warned that its core business of television will not grow much in the sluggish economy. It has become more expensive to license channels and shows from networks, and negotiations are breaking down into public battles around major entertainment events such as the Academy Awards and the World Series.

Dish faces a $2 billion lawsuit from Cablevision alleging it breached its contract to carry Voom channels. This week, it lost a lawsuit to TiVo, which accused it of infringement of its patented digital recording technology.

Craig Moffett, an analyst at Sanford C. Bernstein research, expects Dish’s 14.1 million subscribers to dwindle to 13.7 million by 2015.

“Whether or not having Blockbuster under the Dish Network umbrella really does anything to help seems uncertain at best,” Moffett wrote in a recent report.

Others see broader promise.

“You can’t be a one-trick pony anymore in the communications business,” said Roger Entner, head of Recon Analytics in suburban Boston. “Ergen has a clear long-term plan, and he appears to be picking up the pieces as they become available.”

 
Read what others are saying