Blockbuster May Run Out Of DVDs

Blockbuster (BBI), the world’s largest movie rental chain, has all sorts of problems. It is nearly insolvent. Its model of renting DVDs from stores has been largely bypassed by online  operations such as NetFlix (NFLX). VOD services from cable companies and internet providers from Amazon (AMZN) to Apple (AAPL) make is easy for the consumer to get films and TV shows without leaving their living rooms.

Blockbuster is trying to avoid bankruptcy as it struggles with its debt load and the rental costs for stores that it does not need due to falling demand, but it has warned it may have no other choice.

Blockbuster’s stock currently trades at $.40 because the firm has actually said it could file for Chapter 11 which would allow senior subordinated creditors to take control of the firm.

One of the unintended consequences of Blockbuster’s problems is that it may not be able to buy new DVDs from Hollywood studios. They view the company as too much of a credit risk. Without movies, Blockbuster has no sales. Without sales, Blockbuster will quickly become insolvent.

In its 10-K, the firm writes, ” Given our liquidity limitations and uncertainty surrounding our ability to finance our obligations, we are currently in discussions with several of the large studios regarding the credit terms for our inventory purchases. If the studios tighten their credit terms or if studios eliminate their provision of credit to us altogether, this could result in up-front cash commitments that we may be unable to sustain.”

The problem that creditors have is that they probably cannot run Blockbuster any better than current management. A Chapter 11 filing may allow the company to close stores and lay-off people, but that is only a short-term way for Blockbuster to get around the fact that its services are no longer needed by most consumers.

Blockbuster, once a major innovator in the content distribution business, is now dead as duck. The world of technology allowed competition to flank the company and Blockbuster did nothing about it. At least not until it was too late.

Douglas A. McIntyre