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After 15 years as a high street stalwart, the heavily indebted DVD rental chain Blockbuster has warned that it is in danger of declaring bankruptcy as it faces a possible credit squeeze by Hollywood studios and struggles to keep up with movie buffs' changing technological habits.
The Dallas-based company is labouring under $975m (£635m) of debt, largely inherited when the business was spun out of the media conglomerate Viacom six years ago. After hefty interest repayments, Blockbuster lost $569m during 2009.
In a filing with US regulators, Blockbuster revealed it was in negotiations with top Hollywood studios about the financial terms on which they provide DVDs to its stores. If the studios decide Blockbuster's finances are impaired, they could rewrite the day-to-day credit terms on which they do business with the company – forcing it to make upfront cash commitments.
"We are currently experiencing significant liquidity constraints," said Blockbuster's disclosure. "Should we not be able to generate sufficient cashflow 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 US bankruptcy code."
Under bankruptcy, Blockbuster would stay in business but would seek court approval to renegotiate its finances. The warning prompted Blockbuster's shares to dive by 13 cents to just 26 cents on Wall Street, giving the business, which has 5,200 stores around the world, a market capitalisation of barely $50m.
Blockbuster has found it tough to keep up with technological changes in movie viewing. In its core US market, the company lost customers to a phenomenally popular mail-order DVD service, Netflix. More recently, it has faced a challenge from $1-a-rental movie vending machines at supermarkets and convenience stores operated by a rapidly expanding nationwide firm, Redbox.
In an effort to fight back, Blockbuster is introducing new services, including movies streamed via the internet directly to customers' televisions or phones, and download services allowing people to load films onto memory cards at its shops. But experts say it has not moved fast enough.
Charlie Wolf, an analyst at Needham & Co in New York, said Blockbuster's underlying operations traded close to break-even level but were hamstrung by annual debt interest payments of about $100m.
"They're not going to be a viable competitor in the marketplace with the kind of debt burden they have," said Wolf. "Until that's attacked, this company is really like a dead man walking. Ex that burden, we have a viable story."
Blockbuster suffered a key setback some years ago when it had to curtail the lucrative late fees it charged tardy customers, in response to competition from mail-order firms that allowed unlimited rental periods.
In Britain, the firm has been trying to cut costs by renegotiating leases on its 630 stores, which employ about 5,000 people.
Blockbuster's chief financial officer, Tom Casey, told the Guardian the bankruptcy warning was merely "precautionary language" and customers should not be alarmed.
"Our customers will continue to enjoy the Blockbuster experience through stores, kiosks, by mail and by digital download," Casey said.
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