Where to Next for Blockbuster?

Mar.18.10 | About: Blockbuster Inc. (BBI)

Shares of Blockbuster (BBI) dropped to 28 cents yesterday after the stock lost 29.18% of its value. A Chapter 11 bankruptcy appears highly likely as the firm is saddled with debt. Blockbuster is dealing with declining earnings, profitability, and market share. I wrote a post last March about how Blockbuster’s business model is dead.

In that post I suggested that Blockbuster “close a large number of stores and place self service kiosks in the remaining locations. The company could then commit to offering more downloadable content and online rentals. Eventually Blockbuster could become an online movie rental business with a few store locations. ”

A Chapter 11 bankruptcy may not be worst thing for the former king of movie rentals. Bankruptcy would allow Blockbuster to rid itself of its long term debt problems. Blockbuster has $943 million in debt and just $247 million in cash and cash equivalents. If Blockbuster can unload its debt and change its business model then it may be able to compete in the movie rental business. The way I see it, Blockbuster has three choices going forward.

1. Blockbuster could adopt the Redbox business model. The company could close underperforming store locations and place self service kiosks in the remaining locations. All stores could sell DVDs like Redbox, but Blockbuster could differentiate by offering snacks, candy, and drinks. Blockbuster could set up kiosks in all grocers, fast food chains, and convenience stores that do not currently have agreements with Redbox.

Since Redbox uses McDonald’s (NYSE:MCD) locations to sell DVDs, Blockbuster could negotiate a deal with YUM Brands (NYSE:YUM) and set up kiosks at KFC and Taco Bell locations. Redbox already has Walmart (NYSE:WMT) and Walgreens (WAG). So, Blockbuster could negotiate deals with Costco (NASDAQ:COST), Kmart, and CVS. All kiosks could sell DVDs for 99 cents, making them the low cost provider in the movie rental industry.

2. Blockbuster can place its focus on the digital download business. The company can put all its chips on being the leading content provider of digital delivery programs. Over the next 5 years more people will watch movies from their smartphones, PDAs and computers. Blockbuster could make a niche for themselves in this emerging market. Soon people will be paying for movies for their iPhones, iPads, and iMacs.

3. Blockbuster can compete against Neflix (NASDAQ:NFLX) in the DVD by mail business. This would be the most difficult option because Netflix has a huge advantage in this market and this business model is changing.

All three choices are based on Blockbuster going through a bankruptcy proceeding and getting rid of its onerous debt. If Blockbuster doesn’t finally change its business model, then Blockbuster’s days in the movie rental business are likely over.

Photo by: The Consumerist

Disclosure: No positions