Video rental firm Blockbuster and its domestic subsidiaries have filed for Chapter 11 (bankruptcy) protection with the U.S. Bankruptcy Court for the Southern District of New York.

Dallas-based Blockbuster, which has a library of over 125,000 movie and game titles, has struggled to compete with the new business models of Netflix (Nasdaq: NFLX) and Coinstar's (Nasdaq: CSTR) Redbox kiosks.

Though Blockbuster tried to reinvent itself by adopting similar methods, including DVD mailers, online streaming, and off-site kiosks, it was considerably too late for the company.http:/img.ibtimes.com/www/site/us/images/1px.gif

The Chapter 11 filing of Blockbuster reflects the woes that are hurting the traditional U.S. video rental industry, and the company is a victim of the shift to watching movies online.

Last month, Movie Gallery, once a prime rival for Blockbuster, closed its last store.

To buy a DVD, people used to visit video rental stores like Blockbuster, but now they are ordering them online, watching them through cable or the Internet, or downloading them via the Internet.

Consumers can now obtain discs from mail-delivered subscription services like the one offered by Netflix, or they can get the discs from vending-machine kiosks such as those offered by Redbox.

These shifts in customer mind-set could wipe out the traditional video rental store chain business model.

By the end of the year, there will be fewer than 9,900 video stores, and they will account for 29 percent of the $7.79 billion that consumers will spend to rent movies during 2010, Screen Digest forecasts. In another four years, only 4,400 stores will be left, with 11 percent of a $9.8 billion market.

However, home video is a booming business. A recent estimate from consulting firm PricewaterhouseCoopers says that home video sales and rentals would account for about 68 percent of the $38.4 billion that the U.S. consumers will spend on movies this year. But, the concern is that they will no longer go to a video rental chain for their DVDs.

Netflix vs. Redbox
Now, the Blockbuster has gone out of race, there will be a tough competition between Netflix and Redbox. Over 15 million people subscribe to Netflix, which offers an unlimited number of DVDs by mail for as little as $8.99 a month, and customers can have access not only to the company's storehouse of DVDs, but to 20,000 movies and TV shows that can be streamed live.

On the other hand, Redbox has flooded malls, supermarkets and drugstores with more than 24,000 kiosks that rent DVDs for $1 a night.

Market analysts say that the Blockbuster's pain will be Redbox' gain, as the kiosk operator has a similar customer base who are accustomed to physical rental locations.

Can Blockbuster come back?
Blockbuster, which was spun off from Viacom in 2004, is expected to emerge as a leaner firm post-Chapter 11, ready to take on companies like Netflix and Redbox. The recapitalization will allow the company to shut non-profitable stores, reduce debt, and more importantly, focus on its mail-order service.

Blockbuster has already said it will close 1,000 stores, and as part of the plan, it is expected to close 500 to 800 retail stores on top of that.

But the comeback will not be easy as it sounds. As Blockbuster is shuttering stores, main rival Netflix is getting stronger each day and entering new markets. Recently, Netflix said it is expanding to launch a new streaming service in Canada. On the other hand, Redbox is rapidly expanding its business, with over 24,000 kiosks spread throughout the U.S., up from about 20,000 last year.

Ibtimes

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