Blockbuster Wants Circuit City

Blockbuster has offered $1 billion for consumer electronics retailer Circuit City. Circuit City has been struggling financially, but did post an 11% annual sales increase in the last quarter of 2007. Blockbuster, on the other hand, is part of the DVD movie disc rental business that saw revenues decline nearly 1% last year.

One interesting development is that Circuit City has stopped providing due diligence information to Blockbuster, and is demanding that Blockbuster produce information showing just how it intends to make good on the $1 billion offer.

Perhaps most interesting is why Blockbuster would want Circuit City in the first place. Blockbuster is in the business of renting movies, so why would it want to sell consumer electronics? The answer may be that Blockbuster hopes to position itself for the inevitable changes that are in store for movie rentals. Video on demand from cable and satellite services are already delivering movies, and it’s only a matter of time until movie delivery over Internet broadband becomes easy and good enough to replace DVDs. If Blockbuster comes out with its own branded box that serves up the same movies that you could rent at the local store or by mail, then people would need a place to buy that box. And they’re not likely to go to a DVD rental store to buy it. That means getting shelf space at other retailers, and shelf space is a precious commodity in this business. So it may make sense for Blockbuster to buy its own retail channel, just to help distribute its own hardware products.

This would also expand Blockbuster’s brick and mortar footprint, which could give it an important advantage over its more ephemeral rival, Netflix. So it could be that buying Circuit City may be a brilliant survival strategy that results in revenue growth.