Blockbuster is 'bleeding to death'

blockbuster.gi.top.jpgBy David Goldman, staff writer


NEW YORK (CNNMoney.com) -- Blockbuster is in a heap of trouble with nearly $1 billion in debt, and its latest fixes might not be enough to keep the company from filing for bankruptcy.

The movie rental company launched its newest enterprise on Wednesday, beating rival Netflix to the punch in mobile movies. Blockbuster is now offering on demand video via T-Mobile's new HTC HD2 smart phone. The new service is also expected to be available on Android and Windows Mobile phones soon.

blockbuster_tmobile_hd2.03.jpg
T-Mobile debuted the HTC HD2 on Wednesday, which is the first phone to feature Blockbuster's on demand movie service.

That news follows the company's announcement on Tuesday that it signed a new agreement with movie studio Warner Bros., which is owned by CNNMoney.com's parent company Time Warner (TWX, Fortune 500). The deal will continue to allow Blockbuster to offer the studio's new releases about a month before its chief competitors, Netflix (NFLX) and Coinstar's (CSTR) Redbox.

Blockbuster's latest moves are steps in the right direction. But to overcome nearly $1 billion in debt, unprofitable stores and continued losses, what the company really needs is a major turnaround. Blockbuster said last week it may have to file for bankruptcy protection if it cannot lower its debt by other means.

"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 (BBI, Fortune 500) did not return multiple requests for comment.

Struggling for survival

Blockbuster has been saddled with massive debt since media conglomerate Viacom (VIA) spun the company off in 2004. As part of the deal, Blockbuster had to pay Viacom shareholders a $5 per-share dividend, and the movie rental company accumulated about $1 billion of debt in the process.

At the time, the company was making profits of about $500 million a year, so Blockbuster assumed that it would be able to pay down that debt quickly. But questionable business decisions -- like canceling all late fees -- ate into the company's profits.

So did Netflix.

As Netflix's movies by mail and streaming video services began to catch on in the last decade, Blockbuster was unable to catch up. By the time Blockbuster's competing service, Blockbuster Mail, launched in 2004, Netflix had already been around for six years and had became synonymous with movies by mail.

"Asking if Blockbuster can compete with Netflix online is like asking if Best Buy can compete with Amazon online," said Pachter. "The answer is no. It doesn't matter how well capitalized you are, if the branding isn't there, you're not going to be able to compete."

Blockbuster is also taking aim at Redbox, launching a new partnership with NCR to place 10,000 DVD kiosks around the country by the end of the year. But competing will be difficult: Redbox already has 20,000 kiosks in place, and the company's revenues rose a whopping 99% in 2009.

Solutions

Despite its failure to catch up to the competition so far, Blockbuster may not be a lost cause.

While rumors continue to circulate about a Netflix iPhone application, Blockbuster got to market first today with mobile movies. The new service allows users to download movies to buy or rent, similar to Apple's (AAPL, Fortune 500) iTunes service. Eventually, customers will be able to watch a movie on their phone, and then pick up where they left off on their Blockbuster On Demand enabled TV or Blu-ray player.

Analysts applaud Blockbuster for trying the new venture, but they say its impact will be minimal. Pachter said he expects the company's mobile service will add no more than $5 million to Blockbuster's revenues. Last year, Blockbuster lost $355 million on revenues of $4.1 billion.

To solve its debt problems, Blockbuster has to get its core in-store retail business stabilized. One way the company is doing that is by continuing to shut down underperforming stores. By the end of the year, the company will operate about 3,000 stores in the United States, down from about 4,500 at the start of 2009.

But analysts say the deal with Warner Bros. is the most encouraging news the company has had in a while. In addition to giving Blockbuster a one-month head start over Netflix and Redbox on new releases, the terms of the deal will also ease the company's financial strain.

"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."

Though the financial terms of the deal weren't released, Pachter said the revenue-sharing agreement will allow Blockbuster to pay less money up front for its inventory of movies, and in turn, it will give Warner Bros. a higher percentage of revenues from the rentals.

"That's the right idea," Pachter said. "Blockbuster will gladly sacrifice profitability if they can have more cash up front to pay down their debt." To top of page

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