Once a hot growth company, Blockbuster has gone on to suffer a devastating decline over the past decade. The reasons include bad management decisions and the emergence of new technologies.
Last week the company was sold in a bankruptcy auction to Dish Network (Nasdaq:DISH) for only $228 million. Another notable bidder was Carl Icahn, who probably wanted to liquidate the operation.
However, in the case of Dish, it believes that there is still hope for Blockbuster. The retail network of 1,700 stores can be a footprint to sell more satellite subscriptions. At the same time, Blockbuster has a decent movie-streaming service and is still a well-known brand.
So is Dish on the right track and will the stock get back into orbit? Here’s a look at the pros and cons:
Pros
Powerful business. Dish has spent billions on developing a satellite system, which is a substantial barrier to entry. There are also roughly 14.1 million subscribers, which provide a nice flow of recurring revenue. For the past year, Dish increased revenue to $12.6 billion from $11.67 billion. Net income grew to $985 million from $636 million.
Quality service. Dish has made strides in boosting its content offerings and customer service. The company highlights this in is marketing, saying it provides a better “price-to-value” proposition. Dish also has a variety of platforms for customers to get content, such as from DISHOnline.com, mobile devices and even Google (Nasdaq:GOOG) TV.
Skin in the game. Even though Dish was founded in 1980, the company’s co-founder Charlie Ergen — and his family — still own over 50% of the company’s stock. In other words, there is an alignment of interests in boosting shareholder value. In fact, with DISH trading at a fairly low valuation of 10 times earnings, there is definitely motivation to get the stock price higher.
Cons
Litigation. Dish is fighting a patent lawsuit from TiVo (Nasdaq:TIVO) regarding DVR technology. Currently, Dish is trying to overrule an adverse decision from a federal district court. If it loses, the company will need to pay heavy royalties, which could amount to hundreds of millions.
Intense competition. DISH faces competition from other satellite operators, like DirecTV (NYSE:DTV), as well as cable firms and telcos, such as AT&T (NYSE:T) and Verizon (NYSE:VZ). But perhaps the most threatening rivals are the Internet video-streaming companies. Some of the top include Netflix (Nasdaq:NFLX), Amazon.com (Nasdaq:AMZN) and Hulu.
And Dish is certainly feeling the heat. In the latest quarter, the company saw a loss of 156,000 net subscribers.
Infrastructure costs. Yes, operating a satellite network is not cheap. It’s also subject to many risks. For example, there can be launch delays and even failures. Moreover, when satellites are in orbit, there is always the possibility of malfunctions.
Verdict
The strategic rationale for acquiring Blockbuster’s assets is shaky. In light of the competition, what will the foot traffic be to the stores? And will customers really want to buy satellite subscriptions?
Because of the turmoil of the bankruptcy, there have been few resources for the streaming business. It has certainly emboldened fast-running companies like Netflix.
Oh, and Blockbuster continues to hemorrhage cash.
In light of all this, it looks like the cons outweigh the pros on DISH’s stock.
Tom Taulli’s latest book is “All About Short Selling” and his Twitter account is @ttaulli. He does not own a position in any of the stocks named here.
