It seems like an odd strategy for a company in a mature business with limited growth to buy another with even dimmer prospects.
But that’s what satellite broadcaster Dish Network Corp. did in April when it acquired bankrupt video store chain Blockbuster in a deal valued at $320 million.
Purchasing Blockbuster, and embarking on an almost $3-billion spending spree for broadband spectrum, are part of Dish’s ambitious plans to turn the company from a pay-television service with about 14 million subscribers into a competitor of Netflix Inc. and a player in wireless communications.
“We are putting together the building blocks to be able to provide a whole suite of services to the customer,” Dish President and Chief Executive Joe Clayton said. “Wireless voice, broadband, video, mobile … we’re going to have the capability to do all of the above.”
The former chairman of Sirius Satellite Radio who earlier was instrumental in the development of satellite broadcaster DirecTV Inc., Clayton was recruited two months ago to take over day-to-day operations of Dish from co-founder Charlie Ergen, who remains chairman.
Ergen is now free to focus on big-picture strategy at a time when the pay-television business faces mounting challenges, as consumers increasingly turn to the Internet or services such as Netflix to watch their favorite shows rather than paying for cable or satellite service.
“What Dish has basically done is bought itself a lot of options to keep itself more relevant,” Wells Fargo securities analyst Marci Ryvicker said.
In an interview at Dish’s Colorado headquarters, Clayton made clear that he has big ambitions for Blockbuster, including the launch of a subscription streaming service to rival Netflix, which has a 20-million-subscriber head start.
“Everybody’s enamored with Netflix. Who’s to say we can’t do the same thing?” Clayton said. “We have access to the studios, we have access to huge movie libraries.”
Hollywood, he added, would welcome another bidder for content. “Don’t you think they would encourage us to get into this business?”
Clayton wouldn’t put a timeline on when a Blockbuster streaming service would launch except to say, “Sooner is always better.”
As for the rental chain’s stores, the plan is to keep 1,500 of the 1,700 outlets open. But Clayton is not deluding himself that the traditional DVD rental market is going to make a comeback. He sees the stores as not only DVD rental and sales outlets but also as a promotional platform for Dish and the Blockbuster streaming service, as well as whatever wireless business the company pursues. He doesn’t rule out selling consumer electronics at the chain either, an approach known as a store within a store that has proved successful for RadioShack Corp.
“I will predict that we will have a lot of hardware manufacturers coming to us and saying, ‘Hey, is there room for us?’ ” Clayton said.
Clayton bristled at the notion that the purchase of Blockbuster was illogical.
“I have heard a lot of people say, ‘That was a stupid acquisition.’ That’s crazy,” he said, adding that the Blockbuster brand alone “was worth over $320 million dollars.”
Branding experts say the Blockbuster name still has some value.
“They’re not starting in their own end zone,” noted Allen Adamson, a managing director at brand consultants Landor Associates. “It has the potential to be a strong brand again, but they have to build out an online experience that delivers.”
Still, some Wall Street analysts worry that the company may be biting off more than it can chew with its recent spending spree.
“It sounds ambitious, innovative and expensive,” said Sanford Bernstein analyst Craig Moffett, who last month issued a report on Dish calling the stock a “leap of faith.”
Dish stock has been on a tear, jumping more than 60% from a year ago and 45% since the Blockbuster purchase. It has outperformed the Standard & Poor’s 500 index by about 40% over the last six months.
Although some of those gains can be attributed to Dish’s settling of a long legal battle with digital video recording company TiVo Inc., the strong performance is also seen as a vote of confidence in Ergen, a savvy but secretive entrepreneur who built Dish into the nation’s third-biggest pay-television provider after cable giant Comcast Corp. and rival satellite broadcaster DirecTV.
Ergen, 58, who rarely talks to the press and usually addresses analysts only on earnings calls, has not been subtle about his doubts about the long-term growth of his core business.
“My kids think I’m crazy for being in the pay-TV business because they don’t pay for TV,” Ergen told analysts in November. Noting the competition from not only cable and DirecTV but also Netflix and the Internet, Ergen said, “The world is changing” and Dish has to “figure out how we can do things differently and how we can compete.”
Clayton’s folksy, outgoing manner stands in sharp contrast to his seldom seen and rarely heard boss.
Clayton, 61, describes himself as “an old retail guy.” He wants to give Dish a marketing makeover with less emphasis on how much Dish costs compared to the competition. “I think our image has been the best at the lowest price and I’m not sure that’s exactly the image we should have.”
Although Clayton loves to talk about Dish and Blockbuster, he clams up when it comes to specifics about Dish’s broadband aspirations.
“It’s still somewhat nebulous,” Clayton conceded. He echoed remarks Ergen made during an analyst call in May that Dish probably would look to partner its broadband spectrum with an existing wireless company rather than build from the ground up.
That is some relief to analysts like Moffett, who warned, “It is late in the game to be launching a new wireless business in the United States.”
Still, Moffett is doubtful that any of the obvious suspects — Sprint Nextel Corp., Clearwire Corp. or Verizon Communications Inc. — are game.
“If Charlie Ergen’s goal is to see if he can get someone else to do the heavy lifting financially, it’s hard to see where it comes from,” Moffett said.
Wells Fargo’s Ryvicker is not as worried.
“Dish could sell [its broadband spectrum] back to the government or someone else and probably make a pretty nice profit,” she said.
If anyone knows not to bet against Ergen, it’s Clayton, who competed against him for years.
“I thought I’d buried him I don’t know how many times,” Clayton said, laughing. “He’s got more lives than a cat.”