Blockbuster bankrupts

Terann Hilow

The Signal

Facing a growing debt of approximately $1.46 billion, Blockbuster voluntarily filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code Sept. 23.

The Dallas-based video rental retail chain was granted $125 million to pay debts owed to studios so that the company can stay open for business, maintain their supply of movies and begin a recapitalization process, in which the company will work on transforming its business model Oct 27.

Heading Blockbuster’s recapitalization process is corporate restructuring consultant firm Kurtzman Carlson Consultants LLC, who currently works for 142 active clients including Circuit City and Washington Mutual.

KCC released a statement Oct. 27 reporting that Blockbuster plans to keep 3,000 U.S. stores open as it goes through its recapitalization process. All DVD vending kiosks, by-mail and online businesses will remain open.

Blockbuster also plans to hire 4,000 seasonal employees for the holidays, which the company anticipates to be a popular season for its retail business. The corporation currently employs approximately 25,500 workers in the U.S., with about 7,500 of them working full-time, a sharp contrast compared to their numbers in 2009, when the company employed around 60,000 workers.

In 2009, the 25-year-old company reported that revenue had fallen by 20 percent, totaling a $558.2 million net loss that has continued to accumulate. The company has also closed more than 1,000 stores in the past two years. As Blockbuster undergoes reorganization, it will attempt to sharpen its edge in competition with thriving movie rental companies such as Netflix and Redbox.

In comparison with Blockbuster, Netflix and Redbox are experiencing growth and high rental rates. In fact, Netflix is the world’s largest subscription service streaming movies over the Internet and sending DVDs by mail. Netflix subscribers have grown from approximately one million in 2001 to more than 16.9 million worldwide.

Similarly, Coinstar, Inc. subsidiary, a.k.a. Redbox, currently distributes new release DVDs and Blu-ray Discs to approximately 24,000 of its various self-service kiosk locations. The company averages 9.5 million rentals a week and recently celebrated its one billionth movie rental Sept. 5.

Rick Newman, U.S. News & World Report chief business correspondent, predicted early in 2009 that Blockbuster would be in the predicament to which it finds itself in today. Using Moody’s Investors Service to compile a list of companies facing bankruptcy, Newman wrote an article on “15 Companies That Might Not Survive 2009,” and has since written about the company in his more recent articles, “10 Great Companies That Lost Their Edge” and “How Netflix (and Blockbuster) Killed Blockbuster.”

Based on the knowledge he has gathered over the years in business reporting, Newman describes Blockbuster as a company that once had a lead in the industry, but failed to jump on new opportunities.

“I think Blockbuster made a classic mistake, and this happens time and time again,” Newman said. “Instead of recognizing new technology, they allowed the competition to change its business model and, perhaps, pass them up.”

He predicts that the future looks bleak for companies like Blockbuster who operate retail-based business models.

“People call it a moving target,” Newman said. “At first, the shift was from a retail-based model to the Web. Now, we see it shifting from a Web model to a mobile model.”

Blockbuster was founded in 1985 by Dallas software entrepreneur David Cook, and took off in 1987 after Waste Management Inc. founder Wayne Huizinga took control. In its rise to the top, Blockbuster came to dominate the movie rental retail business in areas where small movie rental business once reigned.

In 1997, Netflix was founded as a by-mail movie rental service at rates comparable to Blockbuster’s, however, in 2004 Blockbuster took its turn and began taking over in the by-mail movie rental business. As profits began to fall, Netflix restructured its business model to stream movies directly to its customers through the web while still operating its by-mail rental services, accessible for a rate of $8.99 per month with no late fees.

At the same time, Redbox started tapping into Blockbuster’s market by offering new release rentals for $1 per day through its self-service kiosks, generally with 24-hour access. Ultimately, as the competition was exploring new innovations, Blockbuster started experiencing a decline in profits and stocks fell to the current price of four cents per share.

Some consumers say that Blockbuster could have prevented bankruptcy if the company would have paid closer attention to consumer demand.

“At one time, Blockbuster was a huge corporation with more money and power than Redbox and Netflix combined,” said Jon Scarbrough, economics major at University of Houston. “They could have easily merged with or bought out Netflix, their largest competitor, and combined their resources to be the dominant firm in the market. They did finally recognize the shift in consumer demand, but by that time it was too late.”

On the other hand, there are consumers who grew up renting their movies from Blockbuster who say that the company offers something nostalgic that companies like Netflix and Redbox cannot compete with.

“I like watching the old classics, so Blockbuster is my number one choice for that,” said Whitney Parks, a Blockbuster customer. “It’s going to be really sad when I won’t be able to scan the aisles of Blockbuster for my old classics anymore because these aren’t available at Redbox, and it doesn’t seem nearly as fun doing this [online] on Netflix.”

As Blockbuster goes through its recapitalization process and works to restructure its business model, the company says it anticipates no changes in rental prices and terms, as well as no changes in its current store hours. To stay updated, visit www.blockbuster.com/recapitalization.