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Dear John: An Open Letter to the Blockbuster CEO

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"C'mon... it's good advice... Give us a Man-Hug!"

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Dear John,

Hello.

I don't flatter myself with the assumption that you would know me from Adam. However, to the extent that you're familar with my work, you probably think me a bit... you regard me as...

Let's just not talk about the past, John. Let's start fresh. I think I can help you win friends, save your company from the wolves and keep your job. I'm a helpful helper who enjoys helping and I'm doing it for free.

If friends are people who tell you the truth, I'm your new best friend.

The Problem

Blockbuster (BBI) is in trouble. Your numbers are frightening. Bear's whip-smart Dana Telsey has sales growing 3.6% in '05 with an EBIT margin dropping 100-freaking-basis points to 3.3%. Since I'm your straight-talkin' friend I'll offer that I think Dana is being too optimistic.

You just lost a bid for Hollywood (HLYW), having offered nearly a billion dollars for the chain. You really wanted them, bidding 10% more than what they ended up selling for and offering to go higher "if Hollywood lets us see their books". Ouch.

You may have been able to obscure that ugliness in a flurry of one-time charges related to competing with with NetFlix (NFLX). From what you've been saying, it looks like you're still trying to. But it won't work. Icahn is lurking. He's done with Kerr-McGee (KMG) and he's looking for dessert.

If things continue down this path, that dessert is going to be you and your executive team. Remember... I'm a friend for telling you this. It's the truth, as I see it. And, to be blunt, I'm right.

The Solution

Don't pay greenmail to anyone. Don't pay a big special dividend. Don't have people debate Icahn about the $51.6m you raked in last year (as your friend I have to say... dude... Nice!). I know he's just mauling you guys. Ignore it. I've got something for you to do that's going to keep you occupied.

Buy NetFlix.

I know it's not a fresh idea. I know you've been asked about it a million times before this. I know all of that and yet I'm telling you that the time is now. It was too soon before but now, with NetFlix relatively cheap and you guys not too far down the road in terms of competitive pursuit, the time is almost eerily perfect. And Amazon (AMZN) agrees.

It's good that Amazon came looking for a deal this week. There's much you can learn from Amazon's history. First, as noted today by Lehman (LEH), Amazon's partnerships haven't exactly overstuffed the registers for Toys (TOY), Target (TGT) or... really anyone.

Second, Amazon's visit and their history in efforts to "branch" into non-retail genres tells you that Amazon is negotiating from weakness. They need either you or NetFlix and they probably don't care which. Consider e*Bay (EBAY) which, growing or not, barely even noticed crushing Amazon's auction initiative. Amazon remembers that. They need a video partner.

The last thing to remember about Amazon is who they did crush. Amazon absolutely demolished the "me-too" offerings from traditional book stores. Killed them with barely an effort. Just like NetFlix is going to do with you, should you take them on. It's going to cost much more to get customers than you think. Distribution will be a monster headache. Traction will be impossible. Just in my opinion, of course [*wink].

You don't want a deal with Amazon, Amazon needs you and your chances are much worse than you're supposed to think vs. NetFlix. Icahn isn't going to let you spend endlessly on that, anyway.

So don't give him the choice. Buy NetFlix for the billion-ish you would have spent on Hollywood. I know... "but Hollywood had 2,000 stores worth of assets!". I've been to quite a few of your stores, John. I buy more DVD's at gas stations than I do at your stores. You didn't want Hollywood and their stores.

You want NetFlix. If your stock drops on the news Icahn will howl but you will have taken control of that battle. "He wanted initiative and growth, didn't he?" If the stock goes up after you announce a bid for NetFlix (and it wouldn't shock me), Icahn will be happy.

Either way, he's much, much less of a problem. Your stores are less of a problem. Your growth is less of a problem and you will be able to actually get the space to fix the stores, should you choose. Post-merger, your job at NetFlix is to stay out of their way, more or less.

Everyone wins. Everyone except me, that is, if I haven't bought back my shares in NetFlix that I sold today. That's right, John. I'm not even talking my book.

Just being a friend.

Respectfully and Sincerely yours,

Macke

-A Helping Helper

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No positions in stocks mentioned.

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