It may be a wrap for Blockbuster (NYSE:BBI).

Standard & Poor's is downgrading shares of the DVD rental specialist a couple of notches to CCC, tagging the company with a negative outlook along the way. S&P is blaming the deteriorating credit metrics as well as rapidly evolving video marketplace for the chain's potential obsolescence.

Blockbuster won't be reporting its fourth-quarter results until next week, but it gave investors a taste last month when it projected adjusted EBITDA for all of 2009 to clock in between $195 million to $205 million. It may be comforting to see a chunky, nine-digit figure there -- but sadly the same thing applies to Blockbuster's bottom line. Given the retailer's hefty depreciation and intangible amortization expenses -- as well as its problematic debt interest -- Blockbuster's outlook calls for a net loss of $183 million to $193 million for 2009.

It's clear that the days of the optical disc as a rental platform are fading, if not numbered entirely. I just wouldn't be so quick to write off Blockbuster.

Let's go over a few of the positives here.

  • Coinstar's (NASDAQ:CNST) Redbox kiosks and Netflix (NASDAQ:NFLX) home-delivered flicks have eaten away at Blockbuster's value proposition, but those two growing companies have recently agreed to release window delays. In short, Blockbuster will be the only of the three to nab a rental of Time Warner's (NYSE:TWX) The Blind Side next month when it first comes out.
  • Blockbuster began testing video game rentals by mail in Cleveland and Seattle last year. This is a market that Netflix has steadfastly avoided and one where the runaway champ -- GameFly -- is profitable with a mere 334,000 subscribers.
  • Smaller rental chains have gone out of business, so Blockbuster is becoming the manned real-world flick renter of last resort.
  • Blockbuster Express is the chain's response to Redbox. The automated kiosks aren't holding Blockbuster back financially, since machine-maker NCR (NYSE:NCR) is bankrolling the rollout.

It's also important not to dismiss Blockbuster's potential as a bricks-and-mortar chain. DVDs may be its bread-and-butter today, but the brand is valuable as an entertainment retailer. It can always morph into a RadioShack (NYSE:RSH) clone with an emphasis on home entertainment.

Naturally Blockbuster will have to stay afloat for any of its advantages to play out. S&P thinks it's time to be worried on that front.