Can the New Blockbuster Compete With Netflix, Redbox?

Blockbuster is on the verge of filing for Chapter 11 bankruptcy protection, and is negotiating a corporate restructuring with creditors that will allow it to cut brick-and-mortar locations and will wipe its debt slate clean, the Wall Street Journal reports. But will a leaner Blockbuster actually be able to compete with Netflix (s NFLX) or Redbox (s CSTR)?

Blockbuster was widely expected to file for Chapter 11 soon, but the WSJ says the filing could happen as early as today, and will likely happen by the end of the week, if not early next. The filing comes as the DVD rental firm has negotiated to get rid of the $930 million in debt that it has been struggling under. Under the terms of the deal, $630 million that is owed to senior debt holders will be converted to equity, with an additional $300 million that is owed to lower-ranked bondholders being wiped out, the Journal reports.

In addition to wiping its debt slate clean, the plan would see Blockbuster cutting the number of retail locations it runs and focusing more on digital distribution and its DVD-by-mail service. Blockbuster has already said it will shutter more than 1,000 brick-and-mortar stores, and as part of the plan it is expected to close an additional 500 to 800 retail stores on top of that.

The idea is for Blockbuster to emerge from bankruptcy protection as a leaner, more nimble organization that is ready to go up against firms like Netflix and Redbox for consumers’ home entertainment dollars. But will it be able to?

The news of Blockbuster’s bankruptcy filing is particularly poignant as it comes on the same day that Netflix announced it is expanding to launch a new streaming service in Canada. While Blockbuster is shuttering stores, its chief rival is entering new markets. Redbox, too, is rapidly expanding its business, with more than 24,000 kiosks spread throughout the U.S., up from about 20,000 this time last year.

Blockbuster has been able to negotiate a small advantage against those firms with an exclusive 28-day window on new release titles from Warner Bros., (s TWX) Sony Pictures (s SNE) and 20th Century Fox. (s NWS) That exclusive window is for its store rentals, DVD-by-mail and its digital storefront.

There’s some evidence that the 28-day window is working, with CEO Jim Keyes saying on the company’s first-quarter investor call that its deal with Warner Bros. was one of the contributing factors in growing same store comparable sales during March. But since it’s been hamstrung by debt, Blockbuster hasn’t been able to advertise its 28-day head start as much as it would like.

On the digital front, Blockbuster has an online movie rental service that is embedded in various consumer electronics devices. Digital sales and rentals provide good margins, especially when compared with physical distribution. But the market for digital storefronts is already crowded, with similar online rental and purchase offerings including Apple’s (s AAPL) iTunes and Amazon (s AMZN) Video on Demand. And it’s becoming even more crowded, as Best Buy (s BBY) will soon have its own digital storefront, and Microsoft (s MSFT) and Sony are extending their existing digital marketplaces from the Xbox 360 and PlayStation game consoles to other devices.

In other words, Blockbuster may emerge from bankruptcy as a more viable business, and could even carve a nice niche for itself out of consumers that are too impatient to wait for new releases to hit Netflix or Redbox, but it will probably never be the market-leading behemoth that it once was.

Photo courtesy of Flickr user Andrew Levine.

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