Hollywood mulls life without Blockbuster
LOS ANGELES (Reuters) - Blockbuster Inc (BBI.N) once ruled the Hollywood video rental market, but its star has long faded with studios quietly moving to other distribution outlets as the home entertainment market evolved.
The nation's top video chain, which has endured no less than four rounds of painful credit refinancing, has hired law firm Kirkland & Ellis LLP to help it again restructure its debt and explore avenues to raise capital.
News reports and a source familiar with the situation say Blockbuster is considering a bankruptcy filing as one of many options, but the company denied this.
Blockbuster shares plunged more than 76 percent before a trading halt on Tuesday.
On the face of it, Blockbuster's woes jeopardize an important distribution channel for major studios from Walt Disney Co (DIS.N) and Sony Corp (6758.T) to Time Warner's Warner Bros (TWX.N) .
And analysts estimate the U.S. chain might owe as much as $900 million in accounts payable to studios, vendors and other suppliers. Total debt stood at $854 million at October 5, 2008, up more than $100 million from the start of 2008.
Truth be told, analysts and industry executives say Hollywood has long explored other options.
"Studios have been watching Blockbuster a long time and presumably Wal-Mart (WMT.N), Target Corp (TGT.N) and Netflix Inc. (NFLX.O) will pick up on the volume," said Harold Vogel, of Vogel Capital Management.
"It's unpleasant but not as catastrophic as it might sound for Hollywood. I'm sure studios would like to have Blockbuster survive, but there are other distribution media that will step into the breach and cushion the blow."
Sony and Warner Bros declined to comment for this story. On Tuesday, Disney CEO Bog Iger told reporters that the media giant was pondering its own online video rental subscription business, an area dominated by the likes of Apple's (AAPL.O) iTunes store and Netflix.
But one studio executive, requesting anonymity, said Hollywood began re-thinking its relationship with Blockbuster around 2005, when billionaire investor Carl Icahn joined the company's board to go after then-CEO John Antioco publicly.
"A lot of studios re-examined their business relationship with Blockbuster around the Icahn turmoil," the executive told Reuters. "I don't think Blockbuster has ever rebounded or successfully addressed Netflix or the impending digital model."
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Netflix, iTunes and other video sites underscore what experts foresee to be the dominant channel for movie distribution: digital downloads and on-demand video piped directly to customers' homes.
Some analysts believe that even if Blockbuster wound up seeking a restructuring to continue operating under bankruptcy protection, Hollywood studios, which supply the chain with DVDs to rent and sell, would be considered "critical vendors" and would therefore be among the first to be paid.
"There would hardly be any hiccup for studios because they are the critical vendors, and would need to get paid in order to keep the product on the shelves and keep the business going," said one home video executive.
In the worst-case scenario, studios stand in line with other creditors to get their due.
Edward Woo, Wedbush Morgan Securities, estimated that Blockbuster had spent $2.7 billion on product and inventory costs, which was mostly video games and DVDs, in 2007.
As of the end of the third quarter, Woo said the company had about $900 million in accounts payable, including an undisclosed portion due to studios.
It's unclear how much of that is owed directly to studios, but Woo estimated less than half.
And Vogel believed the studios have already factored this into their accounting for quite a while.
"It's probably been discounted as a possibility for quite some time and, in a sense, they view it as a one-time hit," he said.
(Editing by Edwin Chan)
