Blockbuster's Circuit City Bid, Wise or Not, Speaks to Convergence

One of the more out-of-the-blue deals in recent memory was floated this week, as troubled Blockbuster made a $1 billion-plus offer to buy troubled Circuit City. The idea, according to this Newsvine report, would be for Blockbuster stores to sell a limited amount of electronics and for Circuit City to have Blockbuster video rentals available.

Circuit City is resisting, and reaction generally is negative (a CNET commentary, for instance, is headlined "Blockbuster/Circuit City: OK, I Don't Get it Either").

Whether this is a savvy move for Blockbuster is not the point here. Blockbuster clearly realizes that broadband convergence is ascendant and that it is increasingly a factor in the daily life of Americans. The emergence of video-on-demand and IP video means that Blockbuster's original model is doomed and fading fast.

Last week, RVA principal Mike Render spoke to IT Business Edge about a study he conducted on behalf of the FTTH Council. The takeaway is that people like fiber and the applications it brings. Said Render:

We are seeing take rates continue to increase, which is positive. The number of people getting advanced services, such as television over fiber, has increased. And we are also seeing the numbers of homes offering 100 megabit connections, while still small, increasing.

Render's study differentiated between FTTH and other broadband conduits, such as fiber-to-the-premises and cable modems. The bigger point is that people looking for something to watch prefer to hit buttons, not get in their cars and drive. Clearly, the trend lines don't look very good for a business based on retail locations with aisle after aisle of little plastic boxes.

Of course, this goes far beyond movies. People are excited by fiber and the possibilities it brings. Said Render:

There is the increasing realization among consumers that there are advantages, so there is more consumer demand for fiber. They will say, "I want my FTTH." We expect to see continuing strong growth in the next few years, with the caveat that the law of numbers says that it is hard to continue the percentage increase as the base of numbers grows larger.

Blockbuster gets this. The proposed deal is not its only effort to evolve from its core video rental business. Last summer, the company acquired online movie service Movielink. Somewhat lost in the Circuit City news is a report that surfaced last week that the company is developing a video streaming set-top device. The device is expected to be a stand-alone, along the lines of the one used by Apple TV and a unit that LG Electronics is building for Netflix, according to CNET.

In formulating its next moves, Blockbuster and other interested parties must look at both big-name cable operators and phone companies, such as Verizon, which this month filed for permission to bring its FiOS to New York City, and smaller operations.

Viodi View reports on a panel extolling small operator IPTV held at the Western Telephone Alliance spring meeting. A representative from Kansas-based Twin Valley Telephone said its IPTV service was achieving take rates of 50 to 55 percent. Comments by a vendor demonstrated how aggressive small operators can be: The presenter said that ADSL 2+ capacity only meets the lowest bandwidth needs suggested by the FTTH Council, so full FTTH builds are becoming appropriate for rebuilds as well as new build scenarios, even for small operators.

The wisdom of Blockbuster's move to acquire Circuit City is being widely questioned. What shouldn't be in doubt is the underlying reason that Blockbuster wants to make the deal. It sees the acquisition as a way to adapt to the new broadband convergence reality.