Blockbuster - The next in line for bankruptcy?

Blockbuster logo

So it seems that DVD, blu-ray, and video game rental store Blockbuster has got itself into a bit of a pickle - a pickle to the tune of US$1 billion in debt to be precise.

That's pretty eye-popping, especially when it wasn't long ago that Blockbuster was boasting annual profits of US$500 million.

The debt was amassed when media conglomerate Viacom (VIA) separated from the company in 2004, thus Blockbuster was hit with a charge to pay Viacom shareholders a US$5 per-share dividend. Collectively, this led to the whopping US$1 billion debt.

Although it seems crazy to suggest, US$1 billion worth of debt needn't be a massive problem for a company that could boast annual profits over $500 million. But it seems Blockbuster's reluctance to take companies like Netflix seriously, as well as other questionable business decisions (cancelling late fee's anyone?) may have accounted for a loss of company profit.

Indeed, Blockbuster finally answered Netflix's movie and streaming video service in 2004, six years after Netflix had started bombarding the market with its flat-rate online DVD and blu-ray rental service. By the time Blockbuster replied with its own Total Access, Netflix was truly established as the number one online and streaming presence in the US.

"Asking if Blockbuster can compete with Netflix online is like asking if Best Buy can compete with Amazon online," said Pachter.

But who's to say that Blockbuster couldn't reaffirm its market leading status? Some online sources have suggested that perhaps Netflix's dominance could have been for the taking. Indeed, Total Access might have been a Netflix killer. At the time, Blockbuster had a pool of cash to pull from to set lower prices and win a bidding war, and the brand name to re-assert its market dominance. They didn't, and its all conjecture now. Blockbuster was left fiddling with price's in a desperate attempt to lure people in.

Similarly Blockbuster is in direct competition with Redbox, a service that specializes in the vending of rental DVDs via self-service and interactive kiosks. Redbox kiosks are located across the whole of the US with an estimated 22,000 kiosks in December 2009.

Perhaps more of an uphill battle for Blockbuster is movie privacy, which accounts for an estimated US$1.3 billion across the US.

Can Blockbuster bust out of the dole-drums?

If Blockbuster goes down, it isn't going to go quietly.

Blockbuster has already reached a deal with Warner Bros. that will enable them to make available new releases a month before both Netflix and Redbox.

"This new agreement reflects our strategy to be the only multichannel provider for movies," said Blockbuster CEO James Keyes in a press release. "This gives Blockbuster a full four-week lead before either kiosk or other subscription services can offer any Warner Bros. titles."

"There's still demand for physical video stores, but that will go away if Blockbuster were to fail," said Charles Wolf, Blockbuster analyst at Needham & Co. "The movie studios realize that, and they realize that there is an important role to be played by Blockbuster's stores."

Blockbuster is also now offering on demand video via T-Mobile's new HTC HD2 smart phone. This new service is also expected to target and be available on Android and Windows Mobile phones soon.

Cutting its dead-wood, Blockbuster is also planning to close around 1500 under-performing stores; an attempt to improve profitability with its remaining successful stores.

"Blockbuster will gladly sacrifice profitability if they can have more cash up front to pay down their debt," said Prachter.

It seems that if Blockbuster is going to avoid Chapter 11 bankruptcy, it will need to revamp its brand, and try an awful lot harder to compete with more dynamic online services.

"Blockbuster is trying to keep itself from bleeding to death, but they're putting on a lot of Band-Aids," said Michael Pachter, Blockbuster analyst at Wedbush Morgan Securities.

"Blockbuster has so many options available," said CEO James Keyes. "We actually have more options available [...] compared to last year."

For the sake of Blockbuster, lets hope they do.

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