Blockbuster’s Downward Spiral

I hate to kick a dog when it’s down, but you really have to feel sorry for investors holding Blockbuster Inc. (NASDAQ/BBI). Faced with declining sales at its stores and a rising trend in on- line rentals and video-on-demand, BBI has failed to adapt to the trend quickly enough, and now it is paying for it.

 Blockbuster believed that its new strategy of eliminating late fees would drive renters back to its stores. Well, the strategy has been a mixed blessing, as the elimination of late fees kept renters renting but also took away some much needed revenues that the rental sales have failed to offset. As I have said in the past, Blockbuster is facing a tough uphill battle if it wants to reverse its current fortune.

 Blockbuster just fell to a new 52-week and historical low of $3.19 last Wednesday. The stock did rebound after Blockbuster announced it had raised $150 million in a stock sale and improved its financial flexibility with its lenders. However, being able to avoid Chapter 11 bankruptcy protection will only help the company for a short period, as the company will still face declining sales.

 The reality is that the trend of on-line video rentals and video-on- demand is on the rise, while rentals at brick and mortar outlets are on the decline. According to research by Screen Digest, estimates call for the on-line DVD rental market in the U.S. to rise to 25% of all video rentals by 2009.

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 For Blockbuster, this news means it has to focus on turning the company around. It still has a well-known brand, but needs to take the offensive on companies such as Netflix (NASDAQ/NFLX), which has seen its shares appreciate 165% over the past year. Blockbuster has declined 58% over the same period.

 It’s now or never for Blockbuster.