Blockbuster files for bankruptcy protection as Americans change their movie-watching habits

Debt, changing media habits topple Blockbuster

NEW YORK — Blockbuster Inc., once the dominant movie rental company in the U.S., filed for Chapter 11 bankruptcy protection on Thursday, reeling from mounting losses, rising debt and competitors that have better catered to Americans’ changed media habits.

For now, Blockbuster will continue to operate its 3,300 U.S. stores, although analysts expect hundreds of them to close under new owners led by billionaire investor Carl Icahn. The Dallas-based company has about 25,500 employees, including 7,500 full-time workers.

The prepackaged bankruptcy case, in the works since the spring, marks the end of an era that Blockbuster and its gold-and-blue torn ticket logo helped establish. Americans used to troop to video stores on Friday for the latest movies. Now, they’re skipping Blockbuster and watching movies from DVD-by-mail services like Netflix Inc., cable video on demand and Redbox vending machines.

The bankruptcy, filed in New York, will wipe out Blockbuster’s badly battered stock, which was delisted from the New York Stock Exchange two months ago because it was nearly worthless.

Icahn and his group own 80 percent of top-priority Blockbuster debt, with a face value of $675 million. Under the proposed reorganization plan, they will get new stock and control of Blockbuster’s board in return for forgiving the debt.

This marks the second time that Icahn has tried to turn around Blockbuster. He pushed Blockbuster to build up its DVD-by-mail service after acquiring a 10 percent stake in the company in 2005, only to see the chain get into deeper trouble.

Blockbuster’s other new owners consist mostly of little-known funds that try to capitalize on the demise of companies by buying their debts for pennies on the dollar. They are: Owl Creek Asset Management, Monarch Alternative Capital, Varde Partners and Stonehill Capital Management.

All told, Blockbuster plans to reduce its debt from nearly $1 billion to about $100 million through the bankruptcy filing. The company has received commitments for $125 million in “debtor-in-possession” financing to repay customers, suppliers and employees during the reorganization. It is seeking access to $45 million right away to ensure it can pay movie studios to keep its stores stocked with DVDs.

Late Thursday, Blockbuster said the court approved a series of requests aimed at enabling the company to continue operating its business as usual, including honoring coupons, gift cards and other customer programs, paying its employees and certain pre-bankruptcy petition claims brought by movie studios.

The court also authorized the company access to up to $20 million from its “debtor in possession” financing.

“After a careful and thorough analysis, we determined that the process announced today provides the optimal path for recapitalizing our balance sheet and positioning Blockbuster for the future as we continue to transform our business model,” CEO Jim Keyes said in a statement.

It’s unclear whether Keyes, Blockbuster’s CEO for the past three years, will remain in charge. Icahn played a role in pushing aside Keyes’ predecessor, John Antioco.

Blockbuster, founded in 1985 by a Dallas software entrepreneur, was once a home entertainment powerhouse. It helped popularize videotape recorders and took off in 1987 after Waste Management Inc. founder Wayne Huizenga took control and began aggressively expanding and buying up competitors.

But Blockbuster has been losing money and market share for years as Netflix, Coinstar Inc.’s Redbox and other services gained popularity. Netflix subscribers have grown from 1 million in 2002 to 15 million in 2010. Redbox, meanwhile, operated 26,900 kiosks as of the end of June. Wedbush Securities analyst Michael Pachter predicts that number will exceed 28,000 by the end of September.

In response, Blockbuster ended late fees and started online services of its own. NCR Corp. started putting out Blockbuster-branded kiosks, and now has 6,600 of them. But it was unable to keep its debt in check.

Blockbuster already has closed more than 1,000 stores in the past two years because so many of them weren’t making money.

Hollywood Video parent Movie Gallery Inc., once the second-largest U.S. movie rental chain behind Blockbuster, had similar problems. It filed for bankruptcy protection in February before liquidating in August.

Movie rentals aren’t the only retail segment that has been disrupted by changing ways to consume media. Amazon.com has challenged traditional booksellers like Borders Inc. and Barnes & Noble Inc. and iTunes helped lead to the end of many record and CD stores.

Blockbuster said Thursday it plans to keep its 3,300 U.S. stores open while it evaluates them. Internet, mail and kiosk businesses will continue to operate.

Blockbuster said in its filing it had about $1 billion in assets and $1.46 billion in debt.

Blockbuster’s largest creditors include the Bank of New York Mellon, Twentieth Century Fox Home Entertainment, Warner Home Video Inc., Sony Pictures Home Entertainment, The Walt Disney Co., Universal Studios Home Entertainment and other movie studios.

AP Business Writer Michael Liedtke in San Francisco contributed to this report.