Company will continue to operate U.S. stores

Hollywood is holding Blockbuster’s hand as the once dominant video rental chain officially filed for Chapter 11 bankruptcy protection Thursday in order to eliminate nearly $1 billion in debt.

Most of the studios are listed among the company’s creditors and it’s in the best interest of the majors to keep Blockbuster’s doors open, considering the company contributes around $500 million to Hollywood’s bottom line each year.

Because of that, Hollywood still considers Blockbuster an important enough revenue generator for its homevideo divisions, which have seen earnings decline due to a change in consumer behavior to rent more rather than build sizable libraries of discs at home during the economic downturn.

Blockbuster also still owes the studios considerable coin, with Fox’s homevideo division owed around $22 million, followed by Warner Bros., with $19 million and Sony, Disney, Universal and Lionsgate are also mentioned in corporate filings.

Bank of New York Mellon Corp. is Blockbuster’s biggest creditor with $315.1 million in debt.

Dallas-based Blockbuster hopes to emerge from bankruptcy proceedings early next year with $100 million in debt.

In order for that to happen, however, Blockbuster will need to shutter up to 800 stores, after having already closed 1,000 stores over the past two years. It currently has around 3,300 stores in the U.S. For now, Blockbuster said its operations in North America and the United Kingdom would continue as usual.

Company has been leaning toward building separate businesses, like DVD- and vidgame-by-mail rentals, kiosks, digital downloads via cable boxes and bringing back late fees. It was limited to how much it could invest in those efforts, though, because of the debt hanging over its head. None have yet been able to make up the money that the company has been losing. Blockbuster’s mail-order service has 1.2 million subscribers, versus the 15 million subs Netflix boasts.

NCR Corp. has been overseeing Blockbuster’s kiosk business, branded Blockbuster Express. Roughly 10,000 are expected to be installed inside grocery and convenience stores by the end of the year, half of what Redbox operates. NCR ponied up its own financing to license the Blockbuster name for the boxes.

Because of that, the bankruptcy isn’t expected to affect NCR’s operation of those rental boxes, saying “it’s business as usual” for the Atlanta-based company.

Either way, Blockbuster needs the support of the studios to survive. It’s renegotiated more financially favorable deals with the majors for DVD and Blu-ray inventory, and set up pacts in which it can rent movies day-and-date with their retail sales launches — something Netflix and Redbox have agreed in most cases to hold off on doing until 28 days later.

“Our long standing relationship with Blockbuster has been mutually beneficial and profitable, and will continue to be so. The special consumer in-store movie shopping experience remains a strong component of our business,” said Simon Swart, executive VP and general manager of Twentieth Century Fox Home Entertainment. “We are confident that Blockbuster will emerge from its reorganization financially healthier and able to innovate to serve the entertainment needs of its huge customer base.”

Still Blockbuster will have to likely negotiate more favorable terms with the studios to survive, and revisit its terms with investor Carl Icahn, who controls a third of Blockbuster’s senior debt. He could control three of its seven board seats once Blockbuster exits Chapter 11, court filings said.

Bankruptcy protection was called “the optimal path” to revive the company, Blockbuster chief Jim Keyes said.

Blockbuster’s woes have been Netflix’s gain, especially on the stock market, with the rental service’s shares rising to an all-time high of $163.72 on Thursday.

Blockbuster has lost lucrative market share to rivals like Netflix and Redbox over the years. Rival Movie Gallery, behind Hollywood Video, closed shop earlier this year.

Netflix currently commands 36% of the $6 billion rental market in the U.S., with Redbox close behind at 25%. Blockbuster is now third with 22%, followed by independent video services and chains rounding out the rest of the 17%, according to Home Media Magazine Market Research.

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