Blockbuster + Columbia House?

The nation's biggest video rental chain and biggest movie club are reportedly discussing a merger. Blockbuster could join forces with Columbia House as a hedge against falling video rental revenue, according to mid-September reports in The Wall Street Journal, The Hollywood Reporter, and elsewhere.

Although video rentals have achieved an all-time high—the Video Software Dealers Association (VSDA) broke its own revenue record last year—the long-term trend among movie fans favors buying DVDs over renting, especially films that will be viewed multiple times.

Low retail prices on new movies as well as classics have driven the trend. Columbia House has dropped its prices several times in the past year, with most back-catalog titles now selling for only $8.98, plus a couple of bucks added for shipping and handling. Big-box discounters like Wal-Mart devote extensive display space to low-priced DVDs, with large bargain bins where movie fans can find "B" and "C" titles for as low as $5, as well as the occasional deep-discount hit film.

Blockbuster, a unit of Viacom since 1994, was something of a latecomer to the DVD business, and hasn't fared well attempting to shift its business toward retailing. Rentals are still its core business, but many consumers buy their favorites and rent films they watch only once. The trend has provoked Viacom shareholders and Wall Street analysts to encourage a spin-off. Viacom also owns cable television divisions, the CBS network, MTV, Infinity Broadcasting, Paramount Pictures, and Paramount Home Entertainment.

Not that Blockbuster is in trouble—the company is a "cash machine" for Viacom, according to The Wall Street Journal, and controls 40% of the video rental market. It will also become debt-free next year, making it a much more efficient source of revenue. Viacom president Mel Karmazin has denied reports that Blockbuster is on the auction block, but the Blackstone Group, which owns Columbia House, is on record as being prepared to buy out Viacom's 80% stake in Blockbuster. The investment firm paid $410 million for a majority stake in Columbia House last year, and reportedly sees a deal with Blockbuster as a way to leverage Columbia House's $750 million annual video business to even greater profits. The remainder of the company's $1 billion yearly total comes from sales of CDs and videotapes.

Combining the two businesses could bode well for both, allowing the two to mine each other's markets. "Heavy buyers of DVDs tend to be heavy movie renters," an unnamed executive told The Wall Street Journal.

Early merger talks don't always lead to a deal, of course. Blackstone Group may not make an attractive offer, Viacom may opt to hang on to Blockbuster, or the video rental giant might become an independent company. "We're fine with whatever happens," said Blockbuster executive Randy Hargrove. "We're open to any option that improves Blockbuster's competitive position and supports the company's strategic long-term goals," he told The Hollywood Reporter.