Blockbuster Nears Bankruptcy -- and That Might Be a Good Thing, Too

Blockbuster (BBI) may have no choice but to file for bankruptcy after disclosing this week that its debt load casts doubt on its ability to continue operating. Responding to this news, CEO Jim Keyes vowed to avoid Chapter 11 and privately restructure the 4,000-store chain's nearly $1 billion in debt.

Bankruptcy, however, could be the best thing for Blockbuster now -- especially if a trip to bankruptcy court is quickly followed by some dramatic moves to reposition the company for the 21st Century.

The company's biggest problem is too much real estate and physical media in an age of online downloads. A bankruptcy-protected reorganization would allow Blockbuster to shed scads of leases quickly. It could retain stores in very high-traffic locations and close most of its big-footprint units. Outside of bankruptcy, that process will be too slow as the chain will need to wait for leases to expire or incur heavy costs buying leases out.

Mass store closures would free the company to accelerate its efforts to join the modern age through Netflix-style mailorder DVDs and online downloads. Its initiatives in these areas so far have been half-hearted and uncoordinated as it struggles to save the store chain.

The company could also concentrate on its smaller Blockbuster Express DVD-rental kiosks that go head-to-head with successful upstart competitor Redbox. Blockbuster announced this week their kiosks will roll out to convenience-store chain Sheetz's 365 stores. That's a step in the right direction.

The chain could emerge from a brief bankruptcy ready to find more places for their Express kiosks. Major grocery chains such as Safeway (SWY) have been managing this business themselves. As use of physical media declines, they might rather outsource the department to a Blockbuster kiosk outside the front doors and remerchandise that retail space for something more lucrative.

Any way it plays out, Blockbuster needs to shrink its physical assets. A quick, prepackaged bankruptcy might be the fastest way to help it modernize. And the chain would almost certainly be better off embracing bankruptcy voluntarily before it's forced into court.

Photo via Flickr user Scott Clark