Bankruptcy is a legal status that declares an organization unable to repay its debts. It is usually initiated by the debtor. Also referred to as total insolvency, bankruptcy occurs when the total liabilities of a business exceeds the value of assets. Total insolvency is legally confirmed when necessary steps, either involuntary or voluntary, are taken by filing a court petition under the bankruptcy code. There are different forms of bankruptcy as stated under the Federal Code of law. The different chapters include 1, 3,5,7,9,11,12,13 and 15. Chapters 1, 3 and 5 are involved with administrative issues while the other chapters deal with other kinds of bankruptcy filings. The most common chapters in many cases are chapter 7 and 11 while 9, 12 and 15 are rarely used for their specificity of kinds of debtors (J.D. 19). Bankruptcy and reorganization entails the act of a federal system of laws to provide for the collection, preservation and maximization of a debtor’s assets for the benefits of creditors. The reorganization process ensures that a financially unstable company or individual utilizes a set of state commercial laws to maximize recovery of creditors’ dues. Such is the case that happened to Blockbuster, which filed for Chapter 11 bankruptcy and a bid to reorganize. This paper will explore the factors that led to the bankruptcy of Blockbuster. It will assess the reasons as to why the company’s competitors gained more revenue and ousted it from monopoly into near bankruptcy.
Blockbuster is an American entertainment company based in Dallas, Texas. The company rents and distributes VHS, DVD as well as Blu-ray video entertainment content in rental stores across the U.S. and in other countries worldwide. With almost three thousand stores in the U.S. only, Blockbuster is recognized as a leading dealer in rentable home entertainment. After filing for bankruptcy on September 2010, the company was acquired by Dish Network, a satellite television service provider, for $320 million (Charlie Ergen and DISH Network Win Blockbuster Inc At Auction for Roughly $320mm). This was after facing stiff competition from new entrants such as Netflix, who also deal in video rental services. The old Blockbuster was successful with an ability to customize store to their neighborhoods. Stores would be loaded up with films that were according to local demographic profiles. The company’s peak period was 2009 when it had an employee base of over sixty thousand. However, the entry of new competitors spelt doom for the video rental giant and this saw it close down most of its outlets and laying off employees. The company filed for Chapter 11 bankruptcy after making huge losses and holding debts amounting to $900 million. Blockbuster’s competitors include Netflix, Redbox and video-on-demand services. Just how did the once leading entertainment company lose its edge? One might wonder.
The early business model
The business model used by Blockbuster for video rental stores entailed paying a large flat fee per video and obtaining unlimited rentals for the entire time of the medium. Its marketing campaigns were not very ubiquitous. In fact, the first campaign was culminated in 2003. In 2007, the Carl and Ray campaign started again with an advertising commercial. Blockbuster also used marketing arrangements with smartphone service providers to install customized software in the devices. The type of software used cannot be removed without nullifying the warranty of the device. Blockbuster used to stock more of newly released movies in rental stores than older ones. This was aimed at maximizing on the intense consumer demands for newly released films. A large amount of newly released film copies was typically sold after the early renting scuttle. Copies that were more than one year after release were rarely retained longer than one year. The trade term used by the rental stores was “depth of a copy”. More so, most Blockbuster stores accepted trade-ins for old DVDs and these would be stocked alongside previously rented films.
Competition struggles of Blockbuster
After Netflix was founded in 1998 by Reed Hastings, Blockbuster held an IPO a year later valued at $4.8 billion. Blockbuster declined several offers for acquisition of Netflix and instead ironed out a deal with Enron Broadband Services to deliver on-demand movies. A year later, Enron filed for bankruptcy after an accounting scandal. Blockbuster posted a loss of $1.6 billion after launching the Super Bowl advert. Meanwhile, Netflix was making huge advancements in business and posted a profit of $6.5 million in earnings on revenue. This was the same time that Redbox launched its video rental services. During this time, competition from these companies was stiffening harder and harder for Blockbuster. In 2005, Blockbuster launched a marketing campaign for its new policy known as “No Late Fees”. This spurred a lot of controversy and multiple states launched investigations into the program. The company was charged with misrepresenting its policy to customers and settled for $650,000 (Carr).
When Blockbuster was announcing of surpassing its two million online platform subscribers goal in 2006, Netflix posted 6.3 million by the same year. This was followed by a loss of half a million subscribers for Blockbuster. The falling company resolved not to report its subscriber count any longer. Blockbuster once proposed buying a struggling electronics company, Circuit City, but withdrew its offer after it was universally panned. Circuit City later filed for bankruptcy. By 2008, everybody had grown fascinated by Netflix and Blockbuster expressed its concerns about this. The CEO was quoted: “I've been frankly confused by this fascination that everybody has with Netflix...Netflix doesn't really have or do anything that we can't or don't already do ourselves” (Carr). It was apparent that Blockbuster was experiencing financial troubles partly due to the stiff competition exerted by Netflix. By September 2010, the company had accumulated debts to the tune of $1.1 billion and planned for filing for bankruptcy. It was valued at just $24 million at that time. This was clearly a ridiculous value for the once leading entertainment giant.
After enduring huge financial troubles, Blockbuster finally filed for Chapter 11 bankruptcy. The company planned to keep its stores open as it reorganized (Lieberman). This marked the end of an era that the company had enjoyed monopoly in the video entertainment market. Blockbuster had dominated American video stores since its inception in 1985. However, things changed later when Americans adopted the services offered by Netflix, watching videos through video subscription. Other companies such as Redbox offered movies on demand through cable, satellite or the internet. In its bankruptcy case, Blockbuster announced its decision to cut its debts so as to restructure its business. Agreements with creditors would allow the company to reduce the debts from almost a billion dollars to about one hundred million. However, the company’s operations in countries other than U.S. were excluded in the bankruptcy as they were regarded as separate entities. These included over four thousand networks of stores in Mexico, UK, Canada and Italy (Blockbuster files for bankruptcy in US).
Blockbuster struggled to compete with Netflix in online rentals. However, all attempts failed to produce profits particularly due to loss of subscribers; a fact that made Netflix maintain its lead against its online competitors. Blockbuster intended to use their digital delivery download service. In this move, the company had purchased Movielink download service so as to compete with Netflix’s Watch. Though the purchase gave Blockbuster a large amount of digital title rights in the marketplace, it did not yield the expected returns. It was apparent that Blockbuster had lost its competitive edge, particularly in the US market (Fiscus). Analysts have it that Blockbuster has struggled with heightened competition in the online market in recent times. By the time it was launching its online DVD subscription service in 2004, Netflix was several years ahead already, having launched a similar service in 1999. It seemed that lack of innovativeness was the main factor that led Blockbuster to bankruptcy. The company had stuck to its rental store business model for ages such that other players ventured into the industry and introduced new exciting offers. For instance, some new entrants offered films delivery via postage and vending machines besides online streaming. Some of Blockbuster’s debtors included Fox, Warner Bros and Paramount among others (AHMED ).
Blockbuster was ages late and millions of dollars less by the time it launched its online movie service in 2004. Since then, the company has been struggling to compete with the mighty Netflix and the results have not been encouraging. With Netflix unleashing its anticipated movie download service, Blockbuster seemed to have lost the battle completely. Netflix’s innovative tricks kept it ahead of Blockbuster and the latter had a lot of work to do. Stiff competition can lead a company to declare its bankruptcy especially if its innovations are constantly behind those of competitors. Competition is one of the dynamic factors that drive growth of industries. However, efficient application of industrial strategies, innovation and trade policies can ensure continued growth in the goods and services markets.