Blockbuster files for bankruptcy in US but local owner says Australian business is safe

After months of speculation, movie rental chain Blockbuster has finally filed for bankruptcy in the United States, with the company crushed under huge debt and an emerging trend towards online rentals and digital distribution.

But local Blockbuster owner Paul Uniacke says the company will continue to operate in Australia as the two businesses are kept totally separate. He argues the company is safe from online players and kiosks such as Quickflix and Oovie, calling them “niche” players in a market dominated by bricks-and-mortar.

He also points out the US chain operates thousands of corporate-owned stores, and blames poor location management as part of the company’s demise.

“As for us here, it’s just business as usual. Our day-to-day operations are not associated with the US.”

“They take a prime location, pay rent that is absolutely ridiculous and then they don’t close or relocate them. I close stores and open stores, and relocate them, so we’re always moving.”

Blockbuster US announced its bankruptcy plans yesterday, filing a voluntary Chapter 11 petition in the New York Bankruptcy Court. It listed assets of $US1.02 billion and debt of $US1.46.

The company also said it has reached a deal with bondholders to restructure the company, having obtained a $125 million loan in order to recapitalise and get back on track, according to a statement.

“To preserve its three-decade long developed brand value, Blockbuster seeks a restructuring that permits a significant deleveraging of its business so that it can move forward at the digital clip at which its industry and competitors are currently running,” Bloomberg reports restructuring officer Jeffery Stegenga as saying.

The company’s largest creditor is Twentieth Century Fox Home Entertainment, with a $US21.6 million claim, while warner Home Video and Sony Pictures Home Entertainment have claims of $US19 million and $US13.3 million respectively.

Chief executive Jim Keyes said in a statement the bankruptcy plan, “provides the optimal path for recapitalising our balance sheet and positioning Blockbuster for the future, as we continue to transform our business model to meet the evolving preferences of our customers”.

But Uniacke says the deal is a positive development and will allow the company to come back even stronger than before.

“The other point is that bankruptcy in the United States is handled differently here. Without putting too much of a spin on it, I think this is the best thing that has ever happened to them because now they can work with their negotiators to develop a plan and keep going.”

However, Blockbuster is hurting due to the growth of Netflix and the growing power of kiosk rental units. Yesterday, Netflix shares rose to an all-time-high of $US163.72 as speculation grew it would snatch up customers from Blockbuster.

The company offers online DVD rentals and digital streaming of movies and television shows, and has grown as American consumers opt for cheaper digital distribution away from physical stores.

But local Blockbuster head Paul Uniacke says such a situation won’t occur here. He says business will continue as usual and the closest players in the digital and kiosk markets, namely Quickflix and Oovie, are only niche players.

“Blockbuster was slow to relate to Netflix. But look at Quickflix here – they have $17 million worth of turnover and they lost $3 million after another rights issue. That model is not sustainable here. I don’t think they’re worth their market capitalisation.”

However, Quickflix executive chairman Stephen Langsford disputes that view and says Blockbuster is “very brave” if it believes digital offerings won’t unfold in Australia as they have in the United States and Britain.

“The way we view Quickflix is that we represent about 1% of the business done at physical retail stores, and we’re excited about that. We think there is plenty of upside ahead.”

“What we’re seeing is that the Australian marketplace is coming online, and eCommerce is lagging, but catching up. I think you’d be very brave to say the decline of the physical stores and the range of online offers won’t play out the same way as it has in the US.”

The latest financial results for Quickflix show the company’s revenue increased by 11% to $7.1 million in the year to June 30, 2010, but recorded a loss of $3 million.

However, Uniacke also says the DVD rental kiosk market is also playing out differently.

“Now if you look at Oovie, they’re putting kiosks in very high traffic locations. But the model is flawed because you always have to find a park and take them back, and they’re discounting a lot as well. That model is struggling to find traction here.”

But Oovie co-founder Ian O’Rourke says the company’s offering is growing and that the kiosk offering isn’t “niche” at all.

“We don’t think kiosks are going to be a niche offering, we’re north of 220 stores at the moment. Oovie is certainly the main larger player, and we don’t plan on being just a niche player. We’re part of Hoyts, and we’re seeing that kiosks aren’t being less effective, they’re just new.”

However, O’Rourke agrees with Uniacke in saying the Quickflix model has some flaws – particularly that mail isn’t delivered on Saturday.

“That model obviously hasn’t worked in Australia. They’ve been operating for awhile and we should be seeing more subscribers there. Part of the problem is that the mail isn’t delivered on Saturday, which is the prime movie-viewing day.”

While Uniacke says there will be a place for digital downloads and online rentals, they won’t be the main products available to consumers and will only play as “niche” offerings.

“File sizes are only going to get bigger, not smaller. Blu-ray files will end up being between 50-70GB. I think downloads will be another product in the mix, and not the only one. These models work, but they won’t be in the mainstream.”

Uniacke says Blockbuster may even start trialling its own kiosks in Australia, as the company has done in the US, but they will be operated in only some select areas.