Blockbuster Begs Before Playing Dead

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When Blockbuster (NYSE: BBI) decided it would let its customers forgo paying late fees on overdue rentals, perhaps it was hoping that its creditors would be just as generous. No such luck. On Wednesday, Blockbuster announced that it is in negotiations with its creditors. The company insists that it is in compliance with its debt covenants, but it's clearly been biting off more than it can chew lately, and it's easy to see why its creditors are getting antsy.

The news sent shares of the leading -- and bleeding -- video rental store giant dropping faster than box office receipts for Gigli. The stock surrendered 16% of its value Wednesday after having already given up plenty since being spun off by Viacom (NYSE: VIA). Three years ago, the stock peaked at $30. Now, a share of Blockbuster may not be enough to land you a flick rental.

Blockbuster has been trying to get its financial house in order. It did away with its pointless dividend. It let Movie Gallery (Nasdaq: MOVI) walk away with the Hollywood Video chain that would have been just one more distraction. It raised the price of its online service. That last point was a sound move in many ways, since the company was losing money in the home delivery market and the cheap monthly price was cheapening the value of its flagship store-based rentals. This all comes at a time when Stock Advisor recommendation Netflix (Nasdaq: NFLX) continues to grow its mail-based DVD rental service, and profitably.

Blockbuster isn't dead. It just has the misfortune of toiling away in a niche that isn't as lucrative as it used to be. But coming to terms with its creditors isn't the only problem. The chain also needs to take a closer look at its model. The fact that Blockbuster's empire stands 9,000 units strong is a testament to its reach. Done right -- and doing it right will likely include a complete makeover -- there is still time to make it a Blockbuster night.

That time, however, is quickly running out.

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Longtime Fool contributor Rick Munarriz has been a Netflix subscriber -- and investor -- since 2002. The Fool has a disclosure policy. He is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.