Blockbuster has made an unsolicited (and heretofore unanswered) bid to acquire Circuit City electronics stores.
The concept initially makes no sense whatsoever, yet could be a tremendously smart idea. And, even better, there's great drama buried underneath the headlines.
Both Blockbuster and Circuit City are suffering business, the latter a bit more than the former. That's because they depend on selling particular hardware devices and software formats, the values of which have been on a mad dash to zero as manufacturing has gotten outsourced, centralized in 5th world economies, and costs thereby reduced. Whatever value remains is attached to the entertainment content, even thought that, too, is fighting the insane variations of free distribution.
Blockbuster and Circuit have found themselves running commodity businesses, or something close. Profit margins stink in those industries. Best Buy, Circuit's erstwhile competitor, is succeeding only by aggressively selling warranties and services for the machines it retails.
So a merger of commodity businesses might make sense purely on the basis of cost-control, if even for nothing more than the short-term. Combining operations could mean firing lots of people. Maybe retail locations could be normalized. There might be economies of scale in purchasing, as both companies buy loads of DVDs (Blockbuster to rent them, and Circuit City to throw them away as loss-leaders to drive consumer traffic).
But maybe there's a grander plan afoot?
If there’s one thing that Apple has shown the world, it's that the intersection and integration of entertainment hardware and software/content are far more important to consumers than the constituent, separate parts. The sum of experience is paramount, and in that experience resides many opportunities for creating value.
Yet the world beyond Apple is anything but orderly. Devices and formats abound. Some work with others, while others work only sometimes. Innovation has become the cover-up word for chaos as each year brings new choices to consumers who are already dumfounded by what;s available to them (ergo Apple's success).
Imagine if "Blockbuster City" could become the hub for such integration.
The new Blu-ray disc is a great example of what might be possible: everyone is reasonably if not very happy with their DVDs; the devices work (they're a gigantic leap in quality and convenience over VHS); and many people have invested significant coin in movie collections.
What if Blockbuster City offered a transition package for consumers, containing a free Blu-Ray player with a commitment to rent discs for a few years, along with some plan to help folks upgrade their old DVDs? A combined business could figure out the pricing and profit models on something like this.
Here's another idea: why couldn't it configure systems of various devices and content -- this mp3 player works best with that service -- and then tack on some really solid consumer support so people would consider Blockbuster City the brand name for buying and enjoying entertainment? It could really become the front-end for bringing together all of the hardware and software confusion that's making possible Apple’s success...only the potential market is far larger.
The merged company would have to think and operate fundamentally different than the separate business do today, but it's not inconceivable. I'm not sure that the short-term wring-money-out-of-the-failing-commodity-business is any smarter, and it's certainly not sustainable.
The rich subtext to this entire shebang is that one of the largest shareholders of Circuit City was the founder of Blockbuster's greatest video rental rival. So this deal would bring the two former competitors together, somewhat.
Talk about the challenges of integration!
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