Blockbuster Acknowledges Possibility of Bankruptcy


Blockbuster Inc. (BBI) has a bit of a liquidity problem. The company, once a dominant force in home entertainment, admitted that if it cannot negotiate decent credit terms with the movie studios to buy new inventory, and if it cannot cough up enough cash to make payments on its sizable debts, it may have to file for bankruptcy.

In an SEC document filed Tuesday, the company said "Should we not be able to generate sufficient cash flow from operations and should the studios tighten or eliminate credit terms, we may determine that it is in the company's best interests to voluntarily seek relief through a pre-packaged, pre-arranged or other type of filing under Chapter 11 of the U.S. Bankruptcy Code."

While Blockbuster CEO Jim Keyes has repeatedly downplayed the threat of Netflix (NFLX) ("I've frankly been confused by this fascination that everybody has with Netflix," Keyes said in 2008), there's little doubt that Blockbuster's digital savvy competitors have a distinctive edge over the company, especially at a time when consumers expect home entertainment to come to them wherever they are -- whether via their computers, their phones or through their TVs.

In the same interview, Keyes said he didn't understand all the emphasis people placed on selection size. "I don't care how many movies are available to me. . . . I want to watch the new stuff so whether we have 10,000 movies or 200 movies it doesn't matter if I don't want to see any of the movies that we have," Keyes said. But his own taste for new releases may not match the preferences of many of his customers.

We'd bet that a big part of Blockbuster's problem is Keyes. The former 7-Eleven CEO joined the retailer in 2005, at a critical transition period for the company. Instead of embracing the digital revolution, Blockbuster has strongly resisted change. In 2008, at a time when in-store kiosks with $1 rentals started popping up everywhere, Blockbuster touted its brick-and-mortar business and dismissed the significance of new distribution models.

And while Netflix serves all-you-can-eat entertainment for a low, fixed rate, Blockbuster recently reinstated late fees and shortened the rental period for premium titles -- those aren't exactly the kinds of changes that will win new customers.