Troubled rental chain Blockbuster has withdrawn its bid to buy troubled electronics retailer Circuit City. The company issued a one paragraph release explaining the news yesterday:

“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.”

While I’d like to say we told you so, the more accurate response would be everyone told you so; a champion for the deal was hard to come by outside of Blockbuster.

So what is the retail proposition that would bring “media content and electronic devices together under one brand?” The answer probably lies within Blockbuster itself. The company has its right-train-wrong-track plans to put digital rental kiosks in its stores. These kiosks require a digital media player, so it’s not too much of a mental leap to think Blockbuster might start selling media devices in-store and expand from there. And Blockbuster is reportedly in talks to join the new pay TV network being built by Viacom-Paramount-Lions Gate-MGM.