Blockbuster’s Bust

October 26, 2010  

By Kimmy Ryan
kryan@smu.edu

Liz Armstrong enters the Blockbuster store at the corner of Hillcrest Avenue and University Boulevard. Everything looks the same, from the movies to the check-out counter and the employees. But, something is different – something that puts the fate of this store and 3,000 others like it in danger.

Blockbuster Inc. voluntarily filed for bankruptcy protection under Chapter 11 last week, meaning the company will attempt to restructure and is not required to make interest payments for the time being. Blockbuster says it will continue to operate its business as usual and emerge from bankruptcy a better and stronger company even though it has been struggling with a heavy debt and significant revenue declines.

Blockbuster is a movie-rental company that has been in business for 25 years. Blockbuster has bricks-and-mortar stores, DVD vending kiosks, and digital and mail delivery. Headquartered in Dallas, the company hit financial hardship when technology-savvy competitor Netflix and convenience-driven competitor Red Box entered the movie rental industry.

Those rivals have lured many movie fans away from blockbuster. “I came to Blockbuster
because I couldn’t find the movie I wanted on iTunes or Netflix. I wanted to watch it now and not wait for it to be mailed to me [through Netflix],” Armstrong said. “But that is the only time I come to Blockbuster. Usually I just download movies.”

Another Blockbuster customer described the business model as “outdated.”

“They need to be thinking ahead of technology,” Kaleigh Richter, a Dallas graduate student, said. “It’s pretty expensive, and I always rack up late fees, so I try not to come here.”

Fewer and fewer people are visiting Blockbuster stores, and it shows in the company’s financial statements. The quarterly report for the period ending July 4, 2010 states that revenues for Blockbuster have decreased by 19.7% compared to the same period a year ago. Operating loss has increased by 14.72%. And Blockbuster’s most recent income statement also shows a net loss of $69.3 million, an almost 75% increase in net loss compared to last year’s quarter.

Coinciding with its drop in net income, Blockbuster’s stock price has collapsed as well. Five years ago Blockbuster’s stock was around $7.30, and 10 years ago it hovered around $8.80. Today, its stock is at approximately $.06.

“After a thorough analysis… the process announced [to file for Chapter 11] provides the optimal path for recapitalizing our balance sheet and positioning Blockbuster for the future,” Jim Keyes, Blockbuster chairman and chief executive officer, said in a press-release statement.

Blockbuster has secured lenders to give the company up to $125 million to help it meet
obligations during the recapitalization process. Blockbuster filed for Chapter 11 in order to strategically restructure its business model and recapitalize its balance sheet, meaning diminish some of its debt. The company’s plan would reduce its debt from approximately $1 billion currently to about $100 million or less, according to a recent press release.

This massive amount of debt began when Viacom Inc. decided
to sell off parts of the company. At Blockbuster’s peak between 1986 and 1993, the company was opening a new store every 17 hours. When the stock price began to waiver, Blockbuster was bought by Viacom. After the spinoffs and expanding too quickly, the company began to lose its value and increase its debt.

In the restructuring, senior bondholders will be asked to swap their debt for equity, while
the subordinated debt holders and owners of the preferred and common stock would get wiped out.

Blockbuster’s interest expense for the period ending July 4, 2010 was $32.1 million. This shows not only the debt burden on Blockbuster, but how much the company stands to save by swapping its debt for equity.

Once Blockbuster is in a stronger financial position, it will be able to better invest in
technologies to meet customers’ preferences, like vending kiosks and digital services. Blockbuster hopes to distinguish itself as the only operator providing access across multiple channels – by-mail, online, kiosks and stores. Analysts believe the company will continue to close many of its bricks-and-mortar stores though. Blockbuster also distinguishes itself by offering rental access to almost half of all new releases 28 days before competitors do.

Although this is the company’s plan for revamping its business model, Stefan Eishen, a Blockbuster customer service representative, believes management
needs to do a better job.

“I’ve been through the thick and thin of this company and have worked here a long time.
Corporate is out of touch with the day-to-day in-store business and needs to gain perspective.” Eishen said.

Eishen works at the Blockbuster on Hillcrest Avenue and University Boulevard. It is the top store in its 14 store district, and for a week in late August, it was the top store in the country. He believes this is because the employees do not follow corporate rules. He says the rules imposed from headquarters require store employees to hit customers with a barrage of official pitches and greetings, but long time employees know their customers and have more effective ways of selling to them.

“Employees know the neighborhood and speak to them in the most effective way possible,” Eishen said.

Unfortunately, long time employees are in short supply due to high employee turnover,
according to Eishen.

Whether it is the in-store business or the business model in general, Blockbuster is at a pivotal point in its lifetime. It is possible Blockbuster will emerge from Chapter 11 and recapitalize with a better strategic business plan, but this is a far-off goal.

Technology passed the company too quickly and left Blockbuster not only in debt, but as an industry loser.

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