How Much Longer Can Blockbuster Hold On?

[JustTheFacts]

How Much Longer Can Blockbuster Hold On?

The question is not if Blockbuster will fold, but when.

The Dallas-based movie rental chain has struggled mightily against upstarts Redbox and Netflix, but Wall Street is openly predicting that the home entertainment veteran is headed to the movie palace in the sky. Blockbuster recently made a list of brands that analysts think will vanish by the end of 2011, according to 24/7 Wall St.

The company is laboring under nearly $1 billion in debt, a number that's been growing steadily since 2004, much of it stemming from a dividend the company paid out following its split with Viacom. At the time, Blockbuster was recording profits of $500 million.

In a sign of how far Blockbuster has fallen, the company recently de-listed from the New York Stock Exchange with shares trading at less than a dollar.

True, it was granted a stay of execution at the beginning of the month, when bondholders gave the company a six-week extension on a $42.4 million interest and principle payment.

But the last-minute shuffling seems moot.

The rental company already has closed 480 locations, and projects to have 3,500 stores operating by the end of the year, roughly half the number it fielded just three years ago. Blockbuster also quietly re-introduced late fees in March, after a disastrous 2004 decision to do away with them in order to compete with Netlfix.


Prior to that, overdue fines accounted for 10 percent of the company’s business.
“I see Blockbuster following Movie Gallery into bankruptcy within two or three years,” Thomas K. Arnold, publisher of Home Media Magazine, told TheWrap, “They’ve done some smart things and [Blockbuster CEO] Jim Keyes is a smart guy, but sometime you just can’t win. Everything they do, somebody else does better."

“Their biggest issue is not the debt, it’s that consumers are renting movies from other sources,” added Edward Woo, an analyst with Wedbush Morgan Securities. “Even without the debt they’d be in a precarious position, because Netflix has the momentum. They’re losing customers, so they’d get to this place eventually.”

Blockbuster has long maintained that its brand recognition would help it weather this fiscal free-fall. To that end, it has has lent its name to cell phone companies T-Mobile and Motorola for an OnDemand movie download service, and inched into the kiosk business with NCR Corporation. NCR invested $60 million in the business, to get 10,000 kiosks up and running, all baring the Blockbuster logo. Blockbuster gets a licensing fee for these co-productions, but the exact terms of the deals are not known.

Name recognition is what attracts NCR and others, but some members of the home entertainment industry maintain that Blockbuster’s brand now is actually intertwined with its downfall. They argue that Blockbuster is too firmly associated with renting physical discs, making it appear ill-equipped for the digital age.

“They’re an anachronism seen as a throwback to the rental era,” Arnold said.


Indeed, while Netflix adds a million subscribers each quarter, the fiscal horizon at Blockbuster grows increasingly stormy. During the first quarter of the year revenue fell to $939 million, from $1.1 billion in the same period a year ago. And the company posted a loss of $67 million, compared to a profit of $25 million in the first quarter of 2009.

Blockbuster declined to directly address rumors of its impending demise, but refused to explicitly rule out a Chapter 11 filing.

“The restructuring process is complex and involves multiparty negotiations that take time,” a Blockbuster spokesperson told TheWrap. “We currently expect any recapitalization to significantly reduce our debt and increase our financial flexibility. We continue to manage the business towards maximizing cash and liquidity and monitoring cost reduction opportunities and operational efficiencies.”

The guarded tone of the statement is a far cry from Keyes' attitude just a few months ago. At that time, the CEO told TheWrap the company would re-emerge like Rocky, battered, but not bested. But the boxing movie in this particular case is looking more like “Million Dollar Baby.”

‘It’s just almost hopeless," Charles Wolf, an analyst with Needham & Company, told TheWrap. "If I were Keyes, I’d throw in the towel.”

Whatever Blockbuster decides to do, it’s not as if video stores will vanish from the landscape overnight. They still make up some 40 percent of the market.

One very powerful constituency that wants them to continue to exist, preferably with Blockbuster at the forefront, are movie studios. Indeed, Hollywood has been one of Blockbuster’s steadfast loyalists, preferring the higher margins the company affords studios to the smaller returns they see on subscription services like Netflix and dollar rentals like Redbox.



Several studios have even been willing to resort to strong-arm tactics to tip the balance of power in Blockbuster's direction. A protracted fight with Netflix and Redbox ended last spring with the two companies agreeing to honor a 28-day delay the rental of many major studios' new releases.

Blockbuster was one of the big winners from that dispute -- shortly thereafter, it entered into pacts with Fox, Warner and Sony that make it the only vendor that can rent new films on the same day they hit DVD and Blu-ray.

At the time, the company intimated that the studios had given them generous terms on the new releases that they purchased, altering the price on movies for a greater revenue share or a lien on the company’s Canadian assets. Several individuals with inside knowledge of the deals, however, dispute this. Instead, they claim, Blockbuster is actually paying a premium for the movies it buys. They also question how charitable the various studios were being in propping up Blockbuster.

“Blockbuster has no negotiating power, and they’re paying full price. It’s the opposite of helping Blockbuster. They’re sticking it to Blockbuster," one individual at a rival home entertainment company told TheWrap.



"The studios know they’re a sinking boat, and they’re getting all the money that they can now.”

Blockbuster declined to comment on the deals and remains mum about the impact that the release windows are having on revenues. Regardless, the company’s money problems prevented them from fully capitalizing on that rare bit of good news.

“When it was first announced that they have a four-week delay with three of the six studios, Blockbuster should have advertised the hell out of it,” Arnold said. “They did a little bit, but they couldn’t afford it. When you can’t market good news, you’re in trouble.”

To be fair, the company did unveil an advertisement last week trumpeting the delay. In it, an announcer draws an allusion to Netflix and Redbox by asking if people would be willing to wait four weeks for an orthodontist appointment or a flight to Hawaii.

Funny stuff, but the delay in getting the word out took a lot longer than 28 days.

[DavidNewlySL]

must you start a thread of things we already know, seen, or have had posted before? they arent late fees, because if it were it would the price of the movie every few days, so that is mis-information.

Thanks for the post...we greatly appreciate it.

[Flantanella]

It depends how long they can hold on. If they still play catch up to the others, I give them a few years( and even thats being nice). They are basically putting band aids on a gun shot wound

My question is why not get rid of the DM's and RDO's of non performing stores. I agree that stores that dont make money need to be shut down, but how come most of my old DM's and RDO's still have jobs. and how much money do they make for hardly doing nothing?


and actually late fees are back. But under a new term so everyone can be fooled

[muhlan]

Aaaahhh another article of 24/7. And again so called "facts" are interpreted in a way that is negative for Blockbuster. That kind of biased reporting is normal for 24/7.

Let us see....

1. "The rental company already has closed 480 locations, and projects to have 3,500 stores operating by the end of the year, roughly half the number it fielded just three years ago. Blockbuster also quietly re-introduced late fees in March, after a disastrous 2004 decision to do away with them in order to compete with Netlfix."
-> Price structure is now the same like at RedBox, but you would never see 24/7 call it Late fees at Rebox.

2. "“The restructuring process is complex and involves multiparty negotiations that take time,” a Blockbuster spokesperson told TheWrap. “We currently expect any recapitalization to significantly reduce our debt and increase our financial flexibility. We continue to manage the business towards maximizing cash and liquidity and monitoring cost reduction opportunities and operational efficiencies.”

The guarded tone of the statement is a far cry from Keyes' attitude just a few months ago. At that time, the CEO told TheWrap the company would re-emerge like Rocky, battered, but not bested. "
-> Not true. They always said that the restructuring is complex, even a few months ago.

3. "At the time, the company intimated that the studios had given them generous terms on the new releases that they purchased, altering the price on movies for a greater revenue share or a lien on the company’s Canadian assets. Several individuals with inside knowledge of the deals, however, dispute this. Instead, they claim, Blockbuster is actually paying a premium for the movies it buys. They also question how charitable the various studios were being in propping up Blockbuster.

“Blockbuster has no negotiating power, and they’re paying full price. It’s the opposite of helping Blockbuster. They’re sticking it to Blockbuster," one individual at a rival home entertainment company told TheWrap."
-> So the only people who are quoted on this are from rival companies. How do these guys have a better insight in Blockbusters terms than Blockbuster itself? And Blockbuser never said that they are paying less to studios. They always said that the studios get a higher share in revenue and Blockbuster gets its money earlier. And the pledge of the Canadian assets was for better longer due date payments from the vendors.

I mean we know the Blockbuster is not in financially good shape right now and that employees are not treated the way they deserve while management is rewarded for doing nothing useful. But the constand bashing in the media by writing biased articles is almost as much annoying. Maybe Jim should send them some pickles as bribery.

[Morbid Angel]

Originally Posted by JustTheFacts

“They’ve done some smart things and [Blockbuster CEO] Jim Keyes is a smart guy, but sometime you just can’t win.

LOL! Yeah, if by smart, you mean a pea sized brain that only has one train of thought: "Must upsell the customers! Must upsell the customers!"

[yodavsjason]

By upsell, do you mean rape?

[Flantanella]

Originally Posted by Morbid Angel

LOL! Yeah, if by smart, you mean a pea sized brain that only has one train of thought: "Must upsell the customers! Must upsell the customers!"

They must have some way to upsell to customers who either have TA or movie pass. Not to mention the empty stores

[DavidNewlySL]

u do realize flantella, that not all stores are empty...

[Flantanella]

exactly, but tell me how someone is suppose to get their goals in the morning shift or night shift on a weekday,when there is hardly people there in the store. One day I had 5 people in a period of 6 hours in the morning shift. 3 had TA and one was movie pass. Sure could have made a candy bundle. But to the idiots concept, we sell to everyone


Even in high volume stores, have slow periods. The only days are the weekends when sales are most likely achieved. So lighten up on the small people, and go after the useless DM's and RDO's to save money. Then maybe there can be a turn around. And give some damn bonus damn it, and maybe the workers would actually want to sell instead of dreading to sell in fear of their job

[abhorrent scowl]

Originally Posted by DavidNewlySL

they arent late fees, because if it were it would the price of the movie every few days, so that is mis-information.

Respectfully, I have to say that is just semantics. The old late fee was the cost of the rental, true. But if you dropped the price of that fee by a few cents (or a few dollars), does that mean it is now no longer a late fee?
No, it just costs less.
Likewise, any late fee can be described as ADR. Didn't brink your library book back? Well you can keep it longer, but it will cost you X dollars. The same is true of rental cars and carpet cleaners.
Whenever you have a defined rental period (which we do), any cost that is charged for exceeding it is a late fee. And customers realize this. And if we try to tell them different, we appear as if we are trying to hide something.