What's next for Blockbuster and Circuit City?

In a not-so-stunning announcement last night, Blockbuster announced that it has withdrawn its bid for Circuit City due to concerns over the viability of the big box retailer.

"Based on market conditions and the completion of our initial due diligence process, we have determined that it is not in the best interest of Blockbuster's shareholders to proceed with an acquisition of Circuit City," said Jim Keyes, Blockbuster Chairman and CEO. "We continue to believe in the strategic merits of a consumer retail proposition that would bring media content and electronic devices together under one brand. We will pursue this strategy through our Blockbuster stores as a way to diversify the business and better serve the entertainment retail segment."

Ever since this deal was announced, I've said it would never happen and was one of the few that said it wasn't worth the trouble. First off, Blockbuster didn't even have the funds to acquire Circuit City, and secondly, I simply didn't understand why a company with its own financial woes would want to be involved with another facing extreme pressure.

Evidently the shareholders agreed with my evaluation. Even though Blockbuster offered $6 per share -- a 54 percent premium -- Circuit City stock hasn't seen $6 since December of last year. In other words, no one was excited about this deal and they quickly realized that Blockbuster was bidding far too much for a company that's worth far too little.

But what happens next for these companies? Will Blockbuster try something new? Will Circuit City be swallowed up by a different company?

Here's what I think:

Blockbuster

Blockbuster is an abandoned ship floating along the ocean on its way to a crash course with land. What does this company have going for it? It's not only getting killed by Netflix in the rental space, but its foray into retail hasn't proven too popular and it's barely turning a profit.

According to its latest figures, Blockbuster's stock price is hovering at a pathetic $2.85, but in the last two quarters, it has been able to turn its loss of $38 million around to a $42 million profit. But why haven't shareholders realized what's going on? Usually, when a company turns a loss into a profit, shareholders are more than willing to invest in the company in the hopes that the trend will continue. But for Blockbuster, that necessary cash inflow isn't coming from investment and I'm sure the Board isn't too pleased.

Of course, the reason why is quite obvious. This company has no prospects for growth. It's surviving in a business that's dying each day, it can't make it in the rental-by-mail market, and now it's trying to make its way into retail? It strikes me as a desperate move by a company that has been backed into a corner.

Then again, some speculation suggests Blockbuster is attempting to load content into portable media players, and we already know that it's trying to establish a networked media hub for its Movielink service. It might also try to get in-store kiosks up and running in an attempt to take Netflix out of the equation and give people movies before they have the time to update their queues.

I commend Blockbuster for trying, but really, does it honestly believe in-store kiosks and loading content onto portable media players is the way to go?

Note to Blockbuster: the only way to save your company is to spend as much cash as possible on Movielink, partner with as many studios as possible, and make sure that when we're asking for movie downloads instead of media, you're the leader by a long-shot. And until then, keep squeaking out your slight profits and hope for the best. If that means you need to downsize each year to do it, so be it -- by the time movie downloads are here, rental chains will be dead anyway.

Circuit City

There's only one way to save Circuit City: sell it to the highest bidder and be done with it.

Circuit City is nothing more than the next CompUSA -- a company that made sense at one point, but now, is nothing more than a barely-trafficked store that can't stand up to Best Buy.

Circuit City's stock price is currently $2.12, its latest fiscal year revenue figure dropped by $700 million, and its net loss in that time was almost $320 million. That doesn't sound like a company that will stay afloat much longer.

The way I see it, Circuit City's issues are two-fold: it's competing against a company in Best Buy that has a superior team of executives, a superior brand name, and a superior store with better customer service, better prices, and a far better experience. Secondly, the company's financial woes are so bad, it has little chance of turning things around and its only solution is to hope someone, anyone, will come along and buy it for what it's really worth: $2 per share.

And maybe that's what Blockbuster will do. By backing out of this deal now, it leaves itself the opportunity to come back in a few months and offer something more logical. If it wants to offer a premium (but why should it?), it shouldn't go higher than $3 per share.

If Blockbuster doesn't come back, look for Circuit City to continue performing poorly and flatten under pressure from its many competitors.

Circuit City is doomed. Based on its financial health, I give it a few years before it's forced to do something drastic to keep itself afloat. It's sad, but true.

Want to know what Don is up to? Follow him on Twitter and FriendFeed.