Dish Network Corp. is betting on Blockbuster Inc. as a hedge against the growing threat of Netflix.
The nation's No. 3 television provider on Wednesday emerged as the winner of an auction for the assets of the bankrupt video store chain. It will pay $233 million in cash and assume $87 million in liabilities and other obligations.
The satellite TV broadcaster's interest in Blockbuster emerged only a week ago and has puzzled many observers. A Dish Network spokeswoman declined to discuss the company's plans.
However, a person present at the auction said representatives for Dish Network indicated that they hoped to use Blockbuster's brand name and online assets to build a digital movie service that could compete with fast-growing Netflix. In a recent conference call with Wall Street analysts, Dish Network Chief Executive Charlie Ergen noted that some consumers were cancelling their subscriptions to premium channels such as HBO in favor of streaming movies and TV show reruns from Netflix.
A person close to Dish Network who requested anonymity because of the sensitivity of talks said discussions about such a move were underway at the company but were still at a preliminary stage.
In addition to a digital movie service, the person present at the auction said Dish Network also intended to use Blockbuster stores to market its TV service. The satellite company could use the help, as it lost 156,000 subscribers in the quarter that ended Dec. 31, leaving it with 14.1 million.
Dish Network offered only a vague indication of its plans in a public 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, the company's executive vice present of sales, marketing and programming.
It's not clear how Dish Network will maintain Blockbuster's DVD rental business, which has deteriorated rapidly in recent years. Nearly half of its U.S. retail locations have closed during the last 12 months. The company currently has 1,751 stores.
The auction for Blockbuster concluded at about 1 a.m. at the law office of Cadwalader, Wickersham & Taft in New York. Along with Dish Network, the final bidders were billionaire investor Carl Icahn, who joined with four liquidation firms, and a group of Blockbuster creditors.
The winning bid provides Blockbuster's secured creditors, who were owed $630 million before it filed for bankruptcy in September, with about $155 million. The remainder will go toward expenses associated with emerging from bankruptcy and to creditors that have provided Blockbuster with services during its Chapter 11 process, including movie studios.
Chris DiMauro, a managing director at investment bank Houlihan Lokey who advised the creditors that bid for the company, said the final result was a mixed bag.
"Our clients were happy that the bidding went up significantly from their" initial bid of $290 million, he said. "But they would have liked to have seen it go even higher."
Dish Network has a history of investing in video companies in hopes that they will complement its traditional television service. In 2007, it acquired Sling Media, maker of a device that lets users watch programs stored on a DVR via the Internet, for $380 million.
Analysts had differing opinions on whether the Blockbuster purchase was smart for Dish Network.
Marci Ryvicker of Wells Fargo described it as "a positive," adding that it "provides Dish with an Internet content platform and delivery method, a content library and greater optionality at a manageable cost."
But Craig Moffett of Bernstein Research described the move as "strategically puzzling" and said that in the face of growing challenges to the satellite TV business from the Internet, "Whether or not having Blockbuster under the Dish Network umbrella really does anything to help seems uncertain at best."
Times staff writers Joe Flint and Meg James contributed to this report.