What Will Dish Network Do With Blockbuster?

(Blockbuster article updated with analyst commentary.)

NEW YORK ( TheStreet) -- Dish Network ( DISH)made the winning bid of $320 million for Blockbuster ( BLOAQ.PK) in the wee hours Wednesday. But what will the satellite giant do with the flailing movie rental chain?

At the very least, it is clear that Dish Network purchased the company with the intention of keeping it afloat. While the company declined to comment, it issued this statement:

"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."

>Dish Network's Blockbuster Bid: $320 Million

By acknowledging Blockbuster's portfolio of more than 1,700 stores, Dish would seem to be indicating that the company plans on utilizing the store base to give it a brick-and-mortar presence.

"It is our understanding that Dish Network plans on maintaining the retail presence and will likely use the Blockbuster store fronts to cross-promote Dish Network," Nomura Equity Research analyst, Mike McCormack, wrote in a note. "We could also imagine permutations where Dish Network would attempt to use Blockbuster's physical DVD inventory as currency to further the kiosk partnership with NCR ( NCR)."

Dish Network was established in March 1996 by Charles Ergen, and currently boasts more than 14.1 million customers. In March, the company agreed to purchase satellite operator DBSD North America for about $1.4 billion once it emerged from bankruptcy.

Ergen's other venture, EchoStar, has also been buying up debt in the satellite company TerreStar Networks. In February, EchoStar announced plans to buy Hughes Communications, the satellite Internet company, for $1.3 billion.

Collins Steward analyst Thomas Eagan said there at least two strategies for Dish. The company can use Blockbuster's portfolio of DVDs and rights to make the company more competitive by offering free DVD and streaming with a new Dish subscription.

"Given that movies is a modest, but meaningful category category for Pay TV companies, Dish could see leverage adopting the Blockbuster brand, ability to create Dish movie plans paired with physical disc distribution, and/or the benefit of greater purchasing scale with Hollywood studios," Deutsche Bank analyst Doug Mitchelson, wrote in a note.

There is also the opportunity to steal a piece of Netflix's ( NFLX) streaming service.

By acquiring Blockbuster, Dish would presumably get Blockbuster's streaming rights for the libraries of all the major studios, as well as the Blockbuster brand and customer list. Combined with Dish's wireless spectrum that it has acquired and technology from EchoStar, Kaufman Bros. analyst Todd Mitchell noted that it could feasibly launch a video service.

Still, neither Dish or Blockbuster has had much luck in the past with online expansion. "It's hard for us to believe Dish would be poised to successfully transform Blockbuster from a money-losing bricks-and-mortar movie rental retailer to a scaled subscription online streaming service," Mitchelson wrote.

Blockbuster's relationship with TiVo is also worth noting, and could have some value to Dish, Mitchelson said.

The purchase of Blockbuster seems to be part of Dish's strategy to reposition the company as a two-way hybrid satellite-wireless network with a content offering that combines its current subscription-based satellite broadcast services with a host of wireless on-demand and over-the-top services, Mitchell wrote in a note.

"That said, there would be limitations to either strategy: the studio deals with Blockbuster are likely to be short-termed and may not be renewed; the streaming rights are likely shallow, in terms of number of titles; and Dish may lack the fulfillment infrastructure needed to distribute the titles," he wrote in a note.

While the acquisition will most likely be dilutive to Dish, given its difficulty at adding subscribers, Eagan says it could provide the company with a strategic lift.

Of course, Dish's intentions will be revealed in the coming weeks, but the news is hopeful for those looking to see Blockbuster, in at least some entity, stay alive.

--Written by Jeanine Poggi in New York.

>To contact the writer of this article, click here: Jeanine Poggi.

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