Start with this. Blockbuster (BBI) has $2.4 billion in rent due from now until its last current store lease expires. Of its 5,194 stores, 939 were operated through franchisees. Blockbuster only pays rent on the stores it operates directly. The company has 3,166 stores overseas. Most of the company’s 67,000 employees work in these stores.

In its DVD online business, Blockbuster believes it will have four million customers at the end of the year.

Closing 5,000 or more stores and laying off 40,000 plus people would, on a one-time basis, but very expensive. But, the leases could probably be converted into a security instrument. Blockbuster would have to try to sell those leases, at a loss, to an entity that believes it can work a number of them out for less than their full value.

Blockbuster’s store business is so bad that the company now has a market cap of only $850 million. NetFlix (NFLX) has a market cap of $1.3 billion. NetFlix is considerable smaller, with a revenue run rate of about $1 billion and an operating income run rate of $75 million. Blockbuster’s revenue is over $5.5 billion, but it has not grown in several years.

If Blockbuster were to have mass store closings and lay-offs and could roll its leases off its balance sheet, the most important issue would be how many of its store customers would convert to online DVD renters. NetFlix has seven million subscribers. It is probably not a bad gamble that Blockbuster could get at least that many online accounts from its current rental base.

Does it work? It might.

Does closing stores a few hundred at a time work. Almost certainly not.

It leaves Blockbuster with a tough problem.

Douglas A. McIntyre can be reached at [email protected]. He does not own securities in companies that he writes about.

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