Blockbuster Deathwatch: Bankruptcy is ‘Possible’

When companies are dying, it’s rarely a quick and painless process. Even so, the demise of Blockbuster has felt like an especially drawn-out and painful one. The latest development came late Tuesday when the company submitted an SEC filing warning that it may file for Chapter 11 bankruptcy, which read in part,

Our future viability is dependent on our ability to execute these plans successfully. If we fail to do so for any reason, we would not have adequate liquidity to fund our operations, would not be able to continue as a going concern and could potentially be forced to seek relief through a filing under U.S. Bankruptcy Code… It is possible that a successful and efficient implementation of an exchange or any of the other strategies we are pursuing will require us to make a pre-packaged, pre-arranged or other type of filing for protection under Chapter 11.

That couldn’t have been a very fun moment for Blockbuster. Still, if you’ve been following the company, you’ve seen the white flag of surrender raised a few times before. It was there in the company’s last earnings call, when CEO Jim Keyes talked about how Netflix grew market share while his company focused on its balance sheet. It showed again when Keyes appeared on CNBC and, in response to rapidfire questions about Blockbuster’s strategy, he kept putting on a hard-luck smile and insisting it wasn’t too late. And again when Blockbuster re-introduced late fees in the stores — that is, in the stores it’s not planning to shut down.

But informing investors of the possibility of bankruptcy is the law, and so Blockbuster is filing to formally notify the SEC of what many investors already know. Of course, filing for bankruptcy is hardly synonymous with corporate death. It simply means you seek court protection from debt-holders while you restructure. In Blockbuster’s case, the move is seen as part of a debt exchange with its creditors.

But once Blockbuster does emerge from bankruptcy, its larger problems will still remain. It operates a chain of expensive brick and mortar stores in a world turning digital. It tried and failed to price Netflix out of the DVD-by-mail business, and sat back as Netflix built a loyal audience for its streaming movies. It passively let Coinstar corner the DVD-rental-kiosk niche that further weakened its stores.

Now, according to Bloomberg, the company is exploring a consignment-sales model where Blockbuster will, instead of buying DVDs from movie studios, rent them shelf space in its stores. The move is aimed at cutting costs, but it will also lower revenue. And revenue has already been in decline for the past several quarters. The company has also been experimenting with new ways to deliver movies, but lags behind Redbox’s rental kiosks and Netflix’s instant streaming.

Blockbuster says it’s in discussions with movie studios about allowing its customers to rent movies through Blockbuster Express (its answer to Coinstar’s Redbox kiosks) on the same day that the movies are available for sale on DVDs. Currently, Netflix and Coinstar must wait four weeks after the movies go on sale. But it’s not clear why studios will want to award special privileges to a company that may be approaching bankruptcy.

Or possibly liquidation. Because if a restructuring doesn’t work, then Blockbuster might be forced to shut sown and sell off its assets to pay its debts. Some vulture investors will lick their chops over the prospect of a distressed retailer because of the value of the real estate it owns. But Blockbuster is likely to disappoint here as well. As Keyes pointed out on the CNBC interview, it owns only 3,500 of its 6,500 stores, and rents the rest.

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