I haven't been kind to Blockbuster (NYSE:BBI) in the past. This probably dates back to the Blockbuster Horror Show article I wrote for Halloween in 2004, and to the many articles I've written since then in which I have taken the video rental giant to task for being too slow to follow Netflix (NASDAQ:NFLX) into the home delivery market.

It's why I wasn't surprised to receive a sarcasm-dipped email last week.

" Hey I was just wondering why you have not posted any articles lately about how well blockbuster is doing?"

Let's put this into perspective. Over the past year, Blockbuster's shares have fallen from just over $10 a stub to less than half that price. The stock has bounced back over the past few days. Blockbuster seems to be getting a little of its swagger back. More than just smiling like Tom DeLay in a mug shot, the company is beaming after a Citigroup upgrade earlier this week.

How cocky is Blockbuster these days? Just check out the title of the press release the company issued last week after Netflix filed a lawsuit to protect its Internet-enabled DVD mail-order rental business.

Success of BLOCKBUSTER Online(R) Draws Patent Claim.

Eat your grinning heart out, DeLay. That's bravado right there. Even if Netflix doesn't have much of a case -- and that's not for you or me to decide -- this doesn't appear to be any less relenting a press release headline than Congratulations, Shareholders, We're Being Sued.

The move also leads one to wonder whether the company is using the same dictionary to define the word "success" that it used to justify the term "no more late fees" a year ago. Success can be financial, and that's clearly not the case here. Blockbuster has been losing money since launching the service. Success can also be a gauge of popularity, but that's not really accurate, either. Blockbuster started out the year with 1.2 million subscribers, and that's three million fewer than Netflix was commanding.

Building the better Blockbuster
We still don't know whether the company is suffering as a result of its online service. One can argue that the marked-down home delivery service has cannibalized the value of in-store rentals. Perhaps, but then one can counter how rival Movie Gallery (NASDAQ:MOVI) has suffered by sticking to its bricks-and-mortar roots.

The only thing that is all but certain is that Blockbuster has gone past the point of no return. It can't really walk away from its mail business, even if it has to ultimately tweak its model after going lawyer to lawyer with Netflix. It can't just close down its stores, either. The company is in too deep on both ends right now. This would normally open up the door to synergies, but giving away in-store rentals to online customers is probably only upsetting the paying in-store faithful.

Last year I offered up four tips to save Blockbuster:

  • Start renting video games online.
  • Institute a cap on mail-ordered rentals.
  • Get out of the bidding war for Hollywood Entertainment.
  • Hook up with Amazon (NASDAQ:AMZN), one way or another.

Thankfully, Blockbuster let Movie Gallery acquire the albatross that Hollywood Video has become. The other three points remain. Blockbuster has the experience of renting video games at the store level. It needs to beat Netflix to the punch to differentiate its service in that regard. Yes, gaming software works on different dynamics, like higher selling prices and shorter life spans, but that's what pricing tiers are all about.

Instituting a cap on rentals is a more realistic way to show the market that you have a feasible profit model in place without facing the kind of throttling accusations being hurled at Netflix.

Then we have the need for Blockbuster to find itself an online partner so prominent that it will no longer have to be the cheapest Internet-based renting service. That's where Amazon would be perfect. The move would also reassure investors that a company like Blockbuster has a plan in place to embrace digital distribution in the future.

Rising above it
The fact that Blockbuster is trading for less than $5 a share isn't a death sentence. Nortel (NYSE:NT), Lucent (NYSE:LU), and Sun Microsystems (NASDAQ:SUNW) all find themselves in that boat, yet they are all respectable companies with market caps in excess of $10 billion.

The problem with Blockbuster is that it's going to take more than an analyst upgrade or a shiny press release to turn its fate around. When the upticks come after debt covenants being relaxed or Carl Icahn's white flag waving, it's not a revival. It's merely the airtime from a speed bump.

So if you want to know why I'm negative on Blockbuster, it's because I'm still holding out for reasons to become positive. The day it beats Netflix to the punch with video game rentals by mail, does the fiscally prudent thing of publicly capping the number of rentals each member can get in any given month, or collaborates with a company like Amazon.com is the day when I will wax positive. Until then, it's just DeLay of game.

Netflix and Amazon are both Motley Fool Stock Advisor recommendations.

Longtime Fool contributor Rick Munarriz has no political agenda to champion by bringing Tom DeLay into this. He just thinks it's a funny mug shot. Rick has been a Netflix subscriber and investor since 2002. T he Fool has a disclosure policy. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.