Bankruptcy Is Not the End for Blockbuster23 Sep, 2010 By: Thomas K. Arnold
Death, as the song (and most religions) contend, is not the end. And nor will bankruptcy signal the end of Blockbuster, the venerable video rental chain that come next year will celebrate its 25th anniversary.
Blockbuster's bankruptcy (to see our story on the filing, click here) is the same pre-packaged deal corporations typically file to get out from under a crushing debt load. We've seen it happen many, many times in the last few years, generally with companies that were under pressure to grow by acquisition and then, when the economy tanked, were stuck with a mountain of debt higher than their asset sheets. It's sort of like being under water on your house, only on a much grander scale.
The Sept. 23 filing by Blockbuster is essentially a recapitalization plan that allows the chain to reduce $1 billion in debt to about $100 million.
And that debt was the single biggest obstacle to Blockbuster's survival, tying management's financial hands to the point where they couldn't even effectively promote, market and advertise Blockbuster's big advantage over rivals Netflix and Redbox: The fact that it gets ALL movies from ALL the studios the day they are released on disc. When three of the six major studios announced 28-day holdbacks on new releases to Netflix and Redbox, many industry insiders likened the deal to throwing a lifeline to Blockbuster. But it's hard to reach for a lifeline when your hands are tied.
In a column several weeks ago, I opined that Blockbuster's debt wasn't the only thing hurting its chances of survival. I speculated that the Blockbuster brand had become a negative, identified far too closely with the traditional brick-and-mortar rental model and all its related evils, such as return trips and late fees.
Not so, argued some of the sharpest minds in our business. So I did a little due diligence. I spoke with random friends and acquaintances, popped my head into a few Blockbuster stores--not just on Friday nights, but also during the week--and lo and behold, they're right. In the proverbial nutshell: consumers equate the Blockbuster brand with movies, not with the old, tired store-rental approach.
Indeed, in the midst of my research I visited the local Vons supermarket and almost couldn't get in the door, thanks to a new Blockbuster rental kiosk right next to the front door. It's a spiffy-looking machine, even shinier and cooler-looking than Redbox's red box (sorry, Mitch!). And the line of consumers waiting to rent a movie seemed excited and motivated--they were getting a movie from an old friend, just in a different way.
In our story on the bankruptcy, longtime Blockbuster analyst Michael Pachter, with Wedbush Morgan Securities, expressed his doubts over Blockbuster's long-term prospects. According to the story, Pachter maintains that "offering a large retail selection and service requires space and staffing, and puts Blockbuster at a cost disadvantage to chief competitors such as Redbox and Netflix."
I can see that, but I happen to think that Blockbuster's current management team, led by Jim Keyes, is quite smart and savvy. And, as I pointed out in a previous column, Blockbuster, unlike fellow rental giant Movie Gallery, has done pretty much everything right these last few years, in terms of aggressively forging into new business models and strategies instead of sticking its head in the sand and sticking to the tried-and-true.
Already, an "evaluation" of its U.S. store portfolio is under way. I happen to think that if Blockbuster draws a hard line in closing marginal stores, reduces the footprint of others and steps up its efforts to compete with Redbox and Netflix in their respective kiosk and on-demand arenas, the chain very well could reverse its fortunes. Much depends, however, on marketing and positioning. Sure, maintaining physical stores puts Blockbuster at a "cost disadvantage," but this disadvantage could easily be overcome by the immediately availabability of Warner, Fox and Universal titles.
Blockbuster doesn't need to rebuild its brand. But it sure as heck needs to rebuild brand awareness.