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The second largest movie chain in the United States has just gone out of business. Movie Gallery is the parent company of the Hollywood Video, Movie Gallery, and Game Crazy chains. The rental chain company just announced plans to close its 2415 stores and liquidate all of its assets. Movie Gallery buckled from declining revenue and increasing debt obligations. The company’s debts dwarfed its assets leaving the movie rental chain with limited funds to service its debt. Movie Gallery had filed for Chapter 11 bankruptcy protection in February hoping to find a way to keep its doors open. Management tried everything from closing stores to cost cutting but nothing worked. None of this changed the fact that Movie Gallery’s business model was obsolete.

In previous posts I have written about the troubles at Blockbuster but today there may a glimmer of hope for the nation’s largest movie chain. The liquidation of Movie Gallery could help boost top-line growth at Blockbuster (BBI). Blockbuster has a slightly better balance sheet than Movie Gallery. Blockbuster has an opportunity to pick up a share of the $1.4 billion in sales revenue that Movie Gallery is leaving behind. Obviously Netflix and RedBox will get a large share of this market but there is room for Blockbuster to benefit as well. There will always be a niche of customers that prefer going to a store than renting from an impersonal machine.

There is also the 28 day advantage that Blockbuster has over Redbox and Netflix. Investors shouldn’t underestimate the effect that a 28 day delay could have on the earnings of Redbox and Netflix. According to the New York Post, 75% of DVD sales are made during the first four weeks. Movie shoppers tend to be an impatient bunch. They want to see a movie immediately after it is released. Blockbuster’s deal with the major studios gives them 4 weeks to capitalize on sales before competitors can cut into these rentals. 

Blockbuster is trying to change its business model by selling movies through kiosks, mail, online, and traditional stores. Being the only major brick and mortar retail chain left in the industry will either be a competitive advantage or a major liability.

The best move for Blockbuster long term is to be acquired by another entity. It obviously makes no sense for Netflix or Coinstar to buy Blockbuster. Neither company has the cash to acquire Blockbuster and Blockbuster doesn’t fit with their current business models. I think that a movie studio should take a look at acquiring Blockbuster. It would make sense for a 20th Century Fox or Universal to acquire the rental giant and use Blockbuster to deliver its movie content. Blockbuster’s distribution channel would be useful for major studios and its emerging digital delivery format would be beneficial.

The only problem with an acquisition by a studio is the massive debt load. Blockbuster is in a similar financial situation to Movie Gallery. Both companies have about the same amount of debt but Blockbuster has more cash. The bondholders are the biggest roadblock to any deal. Blockbuster has $630 million dollars worth of 11.75 percent notes due in 2014. Bondholders would have to be willing to take a substantial haircut for Blockbuster to ensure its long term survival.

While I still would not buy Blockbuster’s shares, I will be paying attention to the company’s earnings announcement on Thursday to hear what company management has to say about future prospects.

Photo by: parislemon

Shares of Blockbuster (BBI) dropped to 28 cents today after the stock lost 29.18% of its value. A Chapter 11 bankruptcy appears highly likely as the firm is saddled with debt. Blockbuster is dealing with declining earnings, profitability, and market share. I wrote a post last March about how Blockbuster’s business model is dead. You can read it here (Blockbuster Is Flat Broke).

In my post last March I suggested that Blockbuster “close a large number of stores and place self service kiosks in the remaining locations. The company could then commit to offering more downloadable content and online rentals. Eventually Blockbuster could become an online movie rental business with a few store locations. ”

A Chapter 11 bankruptcy may not be worst thing for the former king of movie rentals. Bankruptcy would allow Blockbuster to rid itself of its long term debt problems. Blockbuster has $943 million in debt and just $247 million in cash and cash equivalents. If Blockbuster can unload its debt and change its business model than Blockbuster may be able to compete in the movie rental business. The way I see it Blockbuster has three choices going forward.

1. Blockbuster could adopt the Redbox business model. Blockbuster could close underperforming store locations and place self service kiosks in the remaining locations. All Blockbuster stores could sell dvd’s like Redbox but Blockbuster could differentiate by offering snacks, candy, and drinks. Blockbuster could set up kiosks in all grocers, fast food chains, and convenience stores that do not currently have agreements with Redbox. Since Redbox uses McDonald’s locations to sell DVD’s, Blockbuster could negotiate a deal with YUM Brands and set up kiosks at KFC and Taco Bell locations. Redbox already has Walmart and Walgreens. So, Blockbuster could negotiate deals with Costco, Kmart, and CVS. All kiosks could sell dvd’s for 99 cents making them the low cost provider in the movie rental industry.

2. Blockbuster can place its focus on the digital download business. Blockbuster can put all its chips on being the leading content provider of digital delivery programs. Over the next 5 years more people will watch movies from their smartphones, PDA’s and computers. Blockbuster could make a niche for themselves in this emerging market. Soon people will be paying for movies for their iPhones, iPads, and iMacs.

3. Blockbuster can compete against Neflix in the DVD by mail business. This would be the most difficult option because Netflix has a huge advantage in this market and this business model is changing.

All three choices are based on Blockbuster going through a bankruptcy proceeding and getting rid of its onerous debt. If Blockbuster doesn’t finally change its business model than Blockbuster’s days in the movie rental business are likely over.

Photo by: The Consumerist