We don't necessarily want to break into applause when losses narrow.

Blockbuster's (NYSE:BBI) third-quarter report last week offered a letup in the red ink, but the coast is certainly not clear. Yes, the net loss for the period clocked in at just $0.15 a share, after a gargantuan charge-laden slide a year earlier, but we're also talking about a smaller Blockbuster. Over the past year, the number of stores has shrunk from 9,076 to 8,529.

A smaller Blockbuster isn't necessarily a better one. The company can point to store-level trends like DVD rentals increasing domestically, and strong merchandise sales overseas, but at the end of the day, worldwide comps still fell for both rental and merchandise revenue.

New tweaks like its Total Access model are bold, but not necessarily brilliant. The move refashions its Internet-powered mail-delivered rental business to drive customers into its stores. But the generous terms may find it cannibalizing its in-store rentals while attracting the hyperactive renters that rival Netflix (NASDAQ:NFLX) wouldn't mind shedding.

Still, even in cyberspace, it's been pretty hard for Blockbuster. So far in 2006, the company's Blockbuster Online base has grown from 1.2 million to 1.5 million members. Over at Netflix, the subscriber count has gone from 4.2 million to 5.7 million over the same nine months. Blockbuster isn't going to gain any kind of traction if Netflix lands five new subs for every single warm body Blockbuster attracts.

With companies like Amazon.com (NASDAQ:AMZN) and Apple (NASDAQ:AAPL) recently ramping up their digitally delivered alternatives, the clock is ticking on Blockbuster's relevance.

That said, there are still some glimmers of hope here. Free cash flow has actually clocked in positive so far in 2006. The company has been able to trim down its sizable debt. And if Total Access works as planned -- and not how I fear it might -- there should be a lot of in-store foot traffic, and the company has as good a shot as any to work some upsell magic.

I remain skeptical, yet even if I won't necessarily applaud a narrower deficit, I will applaud the company's ability to think outside the rental box. It will not go quietly into the Blockbuster night.

For more on changes in the movie-rental industry:

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Longtime Fool contributor Rick Munarriz has been a Netflix subscriber -- and shareholder -- since 2002. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. T he Fool has a disclosure policy.