The Last Picture Show at Blockbuster?

(The fourth paragraph corrects the title of Michael Lynton, the chairman of Sony Pictures Entertainment)

For years, the collapse of Blockbuster (BBI) has been playing out like a slasher film in slow motion. Now the daunting task of writing a happy ending is falling to James Keyes.

On a sunny day in March, Keyes, 55, chief executive of Dallas-based Blockbuster, is in Hollywood for the second time in a week. After visiting Warner Bros. that morning, he will soon head to lunch at Sony (SNE) and try to pry better terms from the studios on the estimated $1 billion he paid them for DVDs last year. Keyes is trying to buy time to turn Blockbuster into a nimble competitor that can move more of its movies digitally or through the mail. That might fend off Web and mail-order dynamo Netflix (NFLX)—whose market capitalization has rocketed 52% over the past year, to $3.9 billion, vs. a 47% drop, to $62 million, for Blockbuster—and the Redbox (CSTR) vending machines that have become the last-minute movie renter's best friend. "We are a transformation work-in-progress," Keyes, his voice hoarse from bargaining, says as he leans across a table at Starbucks (SBUX). "But I need a little help."

Blockbuster has been trying for years to shed its skin and instead has racked up debt. In 2009 its share of the $6.5 billion rental business fell to 27% from 36% in 2008, says Bernstein Research analyst Michael Nathanson. It lost $932 million in the last two years as revenues tumbled 23%, to $4.1 billion. Debt was $856 million at yearend.


Keyes came to the company in 2007 after 20 years at 7-Eleven. His biggest asset at Blockbuster is that Hollywood wants to see the company survive. Blockbuster is a place where consumers still congregate to buy DVDs; and while rentals remain 75% of its business, sales of DVDs are far more profitable for studios. They get up to $18 on each one sold, vs. around $4 for a rental, according to Sony Pictures Entertainment Chairman Michael Lynton. "We want Jim to succeed," says David Bishop, president of Sony Pictures Home Entertainment. That's why some studios seem to favor Blockbuster over its rivals: On Mar. 23, Warner Bros. signed a deal to let Blockbuster rent DVDs online and through mail order the same day they are released for sale. Earlier, Warner insisted that Netflix and Redbox wait 28 days before offering new flicks.

But Keyes needs to get Hollywood thinking of him as a partner, not a vendor. Keyes says he could conserve cash if the studios would cut his up-front price. Blockbuster asked studios to drop their $18 price tag to as little as $2 in return for stocking more DVDs and giving them a larger share of DVD revenues.

Much of Blockbuster's shelf space is disappearing anyway. The company says in a filing that it closed 374 U.S. stores in 2009 and plans to close up to 545 this year, reducing its total to about 3,500. It has signed deals to provide video-on-demand services to midsize cable operators and hopes to expand to 10,000 the video vending machines it is rolling out with NCR (NCR). The chain provides Blockbuster On Demand movies to TiVo (TIVO) subscribers and owners of Web-connected Samsung TVs.

Can Blockbuster avoid Chapter 11? It says it faces a $390 million debt payment in 2012 and raised the possibility of a restructuring in its filing. "This is a company that has two years to turn itself around," says Wedbush Securities analyst Michael Pachter, who gives Blockbuster a neutral rating. Keyes is "making all the right moves. But he has the lousiest job in the world."

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