Markets A.M.: A Blockbuster Investing Lesson

Dow Jones
06/25

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A Blockbuster Investing Lesson By Spencer Jakab

Trade wars , actual wars , a housing slump and rate uncertainty ? Sounds like a recipe for stocks within 1% of all-time highs. U.S. benchmarks are set to open about flat following their recent rally. Oil prices, meanwhile, look set to recover from a three-day drubbing.

***

With bidding wars for AI companies and talent in the news almost every day, is the next trillion-dollar opportunity getting the cold shoulder?

Please be kind and rewind 25 years to when one dominant company missed a monster opportunity and another agreed to what's been called the worst deal in history . They show that fast-growing, asset-light businesses can "disrupt" existing ones but also risk getting disrupted themselves after attracting silly prices.

Before anyone could imagine it becoming the world's most valuable entertainment company , Netflix co-founders Reed Hastings and Marc Randolph were renting DVDs by mail. The brick-and-mortar video-rental business was dominated by Blockbuster. According to Hastings and Randolph, the two met that year with Blockbuster and offered to sell themselves to the chain for $50 million.

They were practically laughed out of the room . Netflix shareholders, now sitting on a company worth 10,000 times that spurned offer, are laughing all the way to the bank. Blockbuster filed for bankruptcy a decade later. You can stream a documentary about the world's last Blockbuster video store... it's on Netflix .

The same year, with internet pixie dust in its eyes, media giant Time Warner entered the largest merger in history with web portal AOL. From the Journal's coverage that day: "Time Warner has essentially admitted that its own costly efforts to move the company into the digital era have failed, forcing it to hitch a ride into the future with AOL."

Two years after the deal closed Time Warner admitted it had made a gigantic mistake, removing "AOL" from the company's name . Technology moved on and imagined synergies didn't work out.

Hindsight is 20/20, but some executives have vision while the supposed best and brightest lack it. In 1997 Amazon founder Jeff Bezos, who doesn't have an MBA, gave a presentation to a class at Harvard Business School about his company. They formed a group to discuss it, and this was what one told Bezos, according to Brad Stone, author of " The Everything Store ":

"You seem like a really nice guy, so don't take this the wrong way, but you really need to sell to Barnes & Noble and get out now."

Who knows what would have been if Netflix or Amazon had become units of large, hidebound competitors.

We do know why dominant companies fail to embrace the future until it's too late. Executives don't want to cannibalize existing, profitable businesses [https://www.christenseninstitute.org/theory/disruptive-innovation/#::text=Disruptive%20Innovation%20describes%20a%20process%20by%20which, ubiquitous%20from%20Wall%20Street%20to%20Silicon%20Valley.] they understand for ones they don't. By the time their businesses are losing customers, prices are more than full and the next iteration of the disruptive technology is about to make the original one look quaint.

Small investors aren't the only ones who suffer from FOMO.

Stocks I'm Watching

FedEx : When you absolutely, positively have to make your quarterly numbers, but a trade war erupts: The delivery company said it expects a $170 million headwind this quarter from a change in tariff rules for low-value packages . Shares fell more than 5% in premarket trading.

Tesla : The EV maker logged another month of steep sales declines in the European Union. Tesla's new-car registrations fell more than 40% in May , data from a European industry body showed.

QuantumScape : Shares in the startup surged by about one-third premarket after it announced a breakthrough in its process for making solid-state batteries.

General Mills : The maker of Cheerios and other cereals is due to post earnings early Wednesday. In March, the company cut its annual guidance amid a tough market for packaged foods.

BlackBerry : The cybersecurity company raised its annual sales guidance after posting better-than-expected quarterly results . Shares jumped 10% ahead of the open.

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Bond Investors Stay Cool Despite Debate Over Government Borrowing

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On this day in 1974, Texas Instruments and three of its engineers received U.S. Patent No. 3,819,921 for their hand-held aluminum calculator. It was 1 3/4" thick and could add, subtract, multiply and divide. It sold for between $84.95 and $119.95.

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About Me

I've been musing about finance for more than 30 years, including editing The Wall Street Journal's Heard on the Street column for a decade, writing two investing books and running a team of stock analysts at a global investment bank.

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(END) Dow Jones Newswires

June 25, 2025 06:28 ET (10:28 GMT)

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