Blockbuster's way down, but poised for a comeback

Yesterday, U.S. movie rental chain Blockbuster Inc. reported a third quarter net loss of $116.8 million, some $96 million worse than last year. Overall sales were $910.5 million, down from the $1.15 billion it made in the same quarter last year.

Numbers notwithstanding, Blockbuster may be in a better position now than it was earlier this year.

In the spring, Blockbuster looked like it was about to go extinct and end the video store era. While the company was busy dealing with diminished profits as the home video rental market transitioned to streaming video, by-mail rentals, and DVD rental kiosks; it had the additional terror of a huge debt coming due at a time when lending was absolutely frozen.

But in yesterday's earnings call, Blockbuster CEO Jim Keyes gladly said those debts have been taken care of with a $675 million senior secured notes offering, and that it's time for Blockbuster to concentrate on bouncing back against competitors Netflix and Redbox.

"There's really only one threat to Blockbuster and that is if we don't adapt," Keyes said in yesterday's conference. "I am really pleased to report that...our transformation is now continuing. In spite of our change in operating focus for the first three quarters, we did not lose sight of the strategic direction of the company and we have continued on the path toward transforming the company into a multi-channel offering by increasing our points of presence through Blockbuster Express vending kiosks and Blockbuster on-demand digital streaming."

As the economy worsened, Blockbuster's vast amount of retail real estate, (which comprised around 40% of the company's total value) began to look like a big impediment. While the company closed a large number of its stores this year (216 closed last quarter, 115 are expected to close this quarter) Keyes says the Blockbuster store will remain an essential part of the company moving forward.

"As we gain traction in digital streaming, the primary question remains what will become of the stores?" Keyes asked. "Well, the answer is simple -- our stores represent... a compelling competitive advantage. First, with fewer stores available today in the video store industry, there are just simply fewer places to find the breadth and depth of physical DVD offerings. The Blockbuster store is an important part of the entertainment lifestyle of mainstream America. In addition, we remain an important partner of the studios as we offer them a lucrative revenue stream on the majority of their product that never finds its way to the theater."

Indeed, Hollywood studios are divided in their support for $1 kiosk-based and streaming rentals, with some studios delaying their titles from rental circulation until they've been for sale for 30 days. Others have not yet committed to a release schedule yet.

Keyes explains this further. "There are a handful of studios either testing digital day-and-date releases at a higher price point than traditional rental or contemplating a retail window or going day-in date on video on demand. If the studios go day-and-date on video on demand, it provides a significant boost to Blockbuster on demand. If the studios put a retail window in, it would accelerate the popularity of retail movies available in our stores. If the studios put in a vending window, there is certainly an obvious advantage to our stores and we can provide the vending channel with previously viewed product at a lower cost of goods. So the key here is that given our multi-channel approach, we have the flexibility to adapt, the ability to be supportive of the studios and their current and also in the studio's future decisions surrounding viewing windows."

The bottom line is that Blockbuster can capitalize on the studios' desire to squeeze the most profit out of a movie's release.