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Death Watch Time for Blockbuster?

22 Feb, 2011 By: Thomas K. Arnold

Oh, how the mighty have fallen....

The news this morning, that Blockbuster has begun an auction process that will be overseen by the once-mighty video rental chain's four top creditors, really isn't surprisingly. Blockbuster has seen its revenues hit by rivals Netflix and Redbox, both of whom effectively built better mousetraps in delivering rental titles to consumers, and last year filed for Chapter 11 bankruptcy. Since then, the chain has had trouble paying its bills, and in fact is being sued by Summit Entertainment for nearly $10 million worth of product.

We've also been hearing reports that Blockbuster is having trouble getting product from certain studios, and just last week I received a letter from a gentleman in Little Rock, Arkansas, that indicated just how dire the situation really is on the store level:

"I went into my local Blockbuster video store today and saw a big section on a wall reserved for copies of the movie Red.  No copies were available, which surprised me for a Wednesday morning.  I asked the store employee and she said they hadn’t received their copies yet, and she’d been told by her superiors that they didn’t know when they’d get any in.  This is three weeks after the movie was released.  I noticed a few other blank sections on the wall for new releases that hadn’t arrived yet. I saw this first happen a month ago with the release of The Social Network.  It took over a week for this store to get their copies. I’ve been renting at Blockbuster nearly 25 years and I’ve never seen this happen before.  They’ve always had the new releases on the day they were released. Any idea what’s going on?"

What's going on is this: Unless something dramatic happens, Blockbuster won't be around for much longer. Just writing this causes a lump in my throat, a burning feeling deep in the pit of my stomach. For years and years, Blockbuster not only has been the 800-pound gorilla of our industry, but it also has become a pop cultural icon, as much a part of American culture as Coke, Walmart and the iPod. I can't imagine life without Blockbuster, and as I've written in this space before I really think the chain has done everything it can in recent years to reinvent itself short of shutting down all its stores and investing the money in, say, enough computer terminals or kiosks to go head-to-head with Netflix and Redbox.

It's too late for that, of course. Netflix and Redbox both have become too entrenched for anyone to challenge their dominance in their respective sectors of the retail trade, and if either one of them fails it will be because their business model no longer appeals to the consumer--sort of the same thing that did old Blockbuster in.

Of course, the big millstone around Blockbuster's neck was its debt load, which prevented the chain from meeting the Netflix/Redbox challenge head on or even capitalizing on the exclusive availability of rental titles from four of the six majors on street date--a development Blockbuster should have marketed the hell out of but didn't, simply because it had no money.

Now, it's come to this. An auction. The creditors--all hedge fund firms, including Monarch Alternative Capital and Owl Creek Asset Management--have set the opening bid at $290 million, a fraction of what the chain once was valued at. If no bids are received by April 20, the four credits would end up owning Blockbuster.

What they would wind up doing with Blockbuster is anybody's guess. One wag on the Film School Rejects website suggested "somebody rich should scoop up this and MySpace and start a pop culture museum."

Sad, sad.