Blockbuster's credit roll: rental chain files for Chapter 11

Going into administration will save Blockbuster's US arm for now. But will it just delay the inevitable?

by James Taylor
Last Updated: 19 Aug 2013
What a fall from grace for Blockbuster: the once-ubiquitous rental chain has just been forced to file for Chapter 11 bankruptcy protection in the US, after years of shrinking profits and mounting debts. In the short term, this is good news: the ‘prepackaged’ deal agreed with its lenders will allow it to stay in business and roll out (another) restructuring plan. But although Blockbuster still has a high-profile brand, the days of us trooping down to a local store to hire a film for the evening are surely numbered. So it'll need to overhaul its model - and even then it may find it tough to compete with companies who have a couple of years' head-start...
 
Blockbuster's had a hard time in recent years, largely because it's been slow to adapt to the way people want to rent films these days (which, not unreasonably, doesn't involve trekking down to the high street and standing in a queue for ten minutes while the bloke at the front tries to find his membership card, only to discover it’s out-of-date). It's been loss-making for ages now, and according to today's Chapter 11 filing - which only applies to the US division incidentally (the up-for-sale European arm is a separate entity) - its debt pile has rocketed to a whopping $1.46bn. That's a crippling debt burden for a company with a shrinking top and bottom line.
 
So the best thing about this bankruptcy deal is that it will wipe out the majority of this debt (which is owned by super-investor Carl Icahn, amongst others). It's also agreed a $125m loan so it can pay the bills and keep the lights on during its period in Chapter 11. 
 
But that's the easy bit, relatively speaking; the hard part will be turning Blockbuster back into a viable business. Step one will probably be more store closures: it's already announced plans to shutter about 1,000, but since it still has about 3,000 in the US, there'll presumably be a lot more to come. Then it can focus on other distribution channels - though that won't be easy. Online will presumably be a major priority, but it will have a hard job overhauling market leader Netflix. And the same goes for low-cost rental kiosks, where Coinstar's Redbox has been winning custom successfully.
 
It’s hard to escape the suspicion that Blockbuster may have missed the boat; that it didn’t adapt quickly enough to market changes, allowing rivals to overtake it in key areas. But who knows – online film rental is still in its infancy, and brand loyalty is likely to be in short supply. If Blockbuster can come up with a brilliant (and inexpensive) platform, it may not be too late for a happy ending.

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