Blockbuster Hits Rewind on Plan to Come Back as a Netflix Rival

Too Hard to Start From Scratch Without New Devices to Help the Pitch

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Dish Network Chairman Charlie Ergen is giving up on his plan to turn the once-mighty Blockbuster video-store chain into a Netflix competitor and gadget retailer.

When Dish Network acquired Blockbuster out of bankruptcy in April 2011, Mr. Ergen planned to use the stores to sell Dish mobile devices that could be used to stream Blockbuster movies. The plans broke down when U.S. regulators didn't immediately approve a waiver allowing Dish to use its satellite spectrum for terrestrial data and voice transmission.

"You make a lot of mistakes in business," Mr. Ergen, Dish's founder, said in an interview this week. "I don't think Blockbuster is going to be a mistake, but it's unclear if that 's going to be a transformative decision."

Mr. Ergen's plans for Blockbuster turned sour when the regulatory approval process for his radio-wave licenses took longer than expected. He said he believed the government would approve Dish's plan in 2011 as it had done for Philip Falcone's LightSquared Inc., which was also attempting to build a new long-term evolution network.

The government later denied Falcone use of his spectrum over concern that it would interfere with global-positioning systems, causing LightSquared to file for bankruptcy protection. To avoid a similar outcome with Dish, the government slowed down the approval process. The company is still waiting for a ruling.

The government's delay has caused Mr. Ergen to change his mind about selling new devices in Blockbuster stores, putting the retail shops at risk again. "When your lease runs out on the stores, you can't re-up because you can't make enough money from just selling DVDs," Mr. Ergen said.

And without new devices to offer that run on Dish's satellite spectrum, Dish also no longer plans to use Blockbuster as a nationwide video streaming or DVD-by -mail service, Mr. Ergen said.

Dish had planned to entice consumers to buy its devices and wireless services by streaming Blockbuster movies on them. In the absence of that wireless network, a nationwide streaming service would function a lot like Netflix -- except Blockbuster would be starting from scratch against a big incumbent, Mr. Ergen said. Netflix has 24 million U.S. streaming-video customers.

Content providers have caught on to Netflix's business model, Mr. Ergen said, after years of struggling to figure it out. Netflix pays a flat fee for the rights to stream library content. When Netflix was growing rapidly, it was profitable because the company would pay a fee based on the customers it had at the time, then make money by recruiting millions more customers, Mr. Ergen said.

"Netflix at first paid for 5 million customers and they got 25 million," Mr. Ergen said. "But now people are saying, 'OK, you're going to get 30 million customers, so you're going to pay for 30.' If Netflix can get 40 or 50 million, they'll be fine. But if they don't get to 30, they're probably going to go pfft."

Dish had also considered a deal with Coinstar's Redbox, allowing customers to rent a movie from a Redbox kiosk and return it to a Blockbuster store, Mr. Ergen said. Those plans deteriorated when Verizon announced its partnership with Coinstar earlier this year.

Dish has combined the Blockbuster brand with its own offerings by giving Dish customers a "Blockbuster @Home" option, formerly Blockbuster Movie Pass, which allows subscribers to rent DVDs and video games by mail, stream more than 25,000 movies to personal computers and watch more than 3,000 titles at home on TV. The package costs $10 a month and is free for the first three months to new customers.

Dish has begun the process of closing stores that no longer make strategic sense, a plan that will allow Dish to turn a profit on the $320 million acquisition, Mr. Ergen said. Some Blockbuster DVD-rental stores can still make money in rural regions, he said. About 900 U.S. stores remained as of August, a fraction of the thousands Blockbuster once operated.

The company has other plans for Blockbuster on which Mr. Ergen declined to comment. Dish has spent "a lot of time" talking with cable networks about an internet streaming service for live programming, although the service is probably still "years away," Mr. Ergen said.

"Worst case, we'll take our money after having wasted some time, not much money, and life goes on," Mr. Ergen said.

Blockbuster was once so dominant in the home-video market that it was sued by independent video retailers, who claimed in a 2001 lawsuit that the company's revenue-sharing agreements with movie studios hurt competition. The suit was later dismissed.

By the time Viacom spun off Blockbuster in 2004, Netflix was eating into the retailer's customer base with its DVD rentals delivered by mail. Blockbuster was operating about 9,000 stores worldwide then. It filed for bankruptcy protection in September 2010.

~Bloomberg News~
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