Pros and Cons of a Blockbuster/ Circuit City Merger

Blockbuster, the video rental chain that has seen better days, recently announced a proposal to offer one billion dollars to buy struggling electronics retailer Circuit City. Both companies used to be giants in their respective fields, but have had problems in recent years. Blockbuster is hurting from competition on many fronts, including video on demand, video downloads, cable TV, and Netflix. Circuit City has suffered from increased competition and changes in the industry as well. So what are the pros and cons of a merger of the two companies?

PROS

Increased leverage and purchasing power with entertainment content providers

Blockbuster's purchasing power with home video companies is part of the reason they ascended to first place in the industry. Blockbuster was able to dominate the industry with the sheer volume of home videos they purchased. Extending this purchasing power to Circuit City could potentially allow Circuit City to more effectively compete in the video and music sales, which aren't necessarily huge money makers, but can draw people into the store to try out new electronics.

Cross promotional opportunities

For just a small amount of money per store, Blockbuster could setup a home theater area showcasing the latest in videos on the latest of home theater setups available at your local Circuit City. Circuit City could offer free Blockbuster rentals or online memberships for people who buy video equipment from them. Additionally, given the fact that many people are not truly getting the best picture and sound from their televisions and surround systems, each Blockbuster could promote the services of Circuit City technicians to improve the overall viewing experience.

CONS

Businesses have little in common.

Yes, both are essentially entertainment companies, with Circuit City providing hardware and Blockbuster providing software. But promoting a low cost rental is much different than trying to promote big ticket items, and it is hard to see some potential synergies like you would have found in the K-Mart/Sears merger. Mergers are very difficult for even the most successful businesses. Trying to bring together two businesses with little in common can mean a merger that will create difficulties with both companies for a long time.

Neither business has positioned itself well for the future

Blockbuster made its name in the VHS rental industry and became THE player in the business. While Blockbuster has managed to survive where other stores are now failing, it is essentially the last player in an industry that is shifting. Blockbuster has done a good job of moving into the online rental world, but faces stiff competition from Netflix. Its stores are expensive to operate and are coming under increased competition from rental kiosks in places like McDonald's and grocery stores. A major shift to video downloads could leave Blockbuster the final player in a obsolete industry.

Circuit City has different issues. It is being beaten by Best Buy in an industry with cutthroat competition and the added problem of a struggling economy. Without a major new technological advance that people have to have, Circuit City is stuck essentially pushing products that many people already have (computers, HDTV, iPods) in an environment where even grocery stores are selling the same types of things.

FINAL ANALYSIS

While the merger of Circuit City and Blockbuster does have some potential, it is hard to see how combining two struggling retailers with much different focuses will create a strong company better able to compete.