From the beginning, Blockbuster was an immediate success -- and soon devised a model that would revolutionize the industry: With more than 8,000 VHS tapes in more than 6,500 titles, Cook's Blockbuster store was three times larger than its nearest competitor. Unlike other video chains that stored movies behind the counter, Blockbuster displayed titles on shelves. Cook kept his doors open later than traditional video stores. He used a computer system and scanner to track of tapes and ease checkouts. And in perhaps the most crucial move for future growth, Cook determined that Blockbuster would be a family-friendly destination, and he refused to stock adult films. Cook, realizing he had something powerful in his hands, decided to completely abandon the oil industry, renaming the company Blockbuster Entertainment and issuing a new ticker on Nasdaq.
By May 1989, however, Blockbuster's push to acquire rival chains suffered a setback when a Bear Sterns analyst issued a report criticizing the company's accounting practices, calling it "inaccurate and grossly misleading." The report claimed Blockbuster's earnings growth was "due to dubious merger accounting, nonrecurring sales to new franchises, and changes in amortization practices." Despite these concerns, Blockbuster refused to change its accounting practices. While investors quickly forgot about the potentially misleading practice, analysts started to question the long-term growth prospects of the company, especially after its largest shareholder, United Artists Entertainment, announced it would divest its 12% stake and sell its 28 franchised stores. It didn't help that Blockbuster's sales growth was also waning. In 1988 monthly sales of company-owned stores had shot up 35%, but then rose just 8% and 7.5% in 1989 and 1990, respectively. Huizenga blamed the Gulf War for detracting attention away from videos and instead to television news. At the time, pay-per-view and cable programming were becoming more mainstream. Faced with this rapidly maturing industry, Blockbuster looked to international expansion and in an effort to boost earnings lowered its rental price for hit movies.
Act 3: Blockbuster Goes Into Wide Release
By 1993 there were more than 3,400 stores and Blockbuster was looking beyond its core video chain business to fuel growth. Its next conquest -- the music industry. The company purchased music chains Sound Warehouse and Music Plus and entered a partnership with Virgin Retail to open music mega-stores in the U.S., Europe and Australia that were later called Blockbuster Music.
In September 1993, Blockbuster proposed a $4.7 billion merger with media giant Viacom ( VIA - Get Report), which, at the time, was in a bidding war for Paramount Communications with QVC. Blockbuster, eager to get in on this deal and grow its new media initiatives, heavily invested in Viacom to help sweeten its bid. But the prolonged takeover battle became a drain on both Viacom and Blockbuster, and merger talks stalled, driving down the stock of both companies. Viacom ultimately ended up purchasing Blockbuster for $8.4 billion. The buyout ignited an executive shakeup, where Blockbuster saw CEOs resign at a rate of one a year for three years. Huizenga stepped down in September 1994 and was replaced by President Steven Berrard. Berrad held the post for just a year-and-a-half, before former Wal-Mart ( WMT) executive, Bill Fields, stepped in. Fields unexpectedly resigned in spring 1997 and John Antioco took over that summer. Antioco inherited a company in tatters: new releases weren't making it to the stores on time, a cutback in employees left store operations in shambles, and cash flow for the second-quarter of 1997 had plunged 70%. Its Blockbuster Music initiative wasn't growing as fast as Viacom would have liked, and had resulted in substantial losses for the parent company.
"Imagine a Blockbuster night without Blockbuster, a time when no video store will ever slap you with a late fee or fine you for failing to rewind. Because in this world, there are no videos, only home computers," the Chicago Sun-Times wrote back in June 1999. Already, the Internet was being viewed as a potential killer of the video industry. At the time, Amazon ( AMZN - Get Report) had just entered the market, expanding from selling cheap books online to cheap DVDs, and a little company called Netflix rolled out a subscription service.
In December of 2004, Blockbuster sought control of its biggest rival, the now defunct Hollywood Video, through a hostile takeover. Billionaire investor Carl Icahn was intent on seeing this deal done, and attempting to facilitate the takeover by becoming the largest shareholder of Blockbuster, with 9.98 million shares worth about $83.9 million. Blockbuster proposed an offer of about $700 million, or $10.25 a share, later upping the bid to $1 billion. But Hollywood Video instead agreed to be bought out by Movie Gallery in January 2005. With so much invested in Blockbuster, and a Hollywood Video deal squelched, Icahn looked for ways to beef up Blockbuster's return, butting heads with Antioco in the process. In May 2005 Icahn waged a successful proxy fight to add himself, and two other members, to the board. Icahn accused Blockbuster of overpaying Antioco, who received $51.6 million in compensation in 2004.
During his first few years on the job, Keyes slashed costs, tweaked product and aggressively marketed online and digital services, managing to briefly return Blockbuster to profitability. The company changed its image from "Blockbuster Video" to "Blockbuster Media," and once again experienced sales growth. Still, the bed for bankruptcy has already been made before Keyes took over, when in early 2007 the company had missed a bank covenant and had to renegotiate its credit terms for the fourth time. The company had been relying heavily on a $400 million credit, which expired in August 2009. Blockbuster also still owed a substantial amount of debt to former parent Viacom. A few quarters of profit weren't enough to revive the company, which sustained more than $4 billion in losses since 2001. And then, of course, the recession set in, which only served to further hinder the already decaying business. By March of 2009, bankruptcy fears were emerging, and a year later Keyes warned that if Blockbuster was unable to shore up enough cash to repay its nearly $1 billion in debt, it could be forced to file Ch. 11. Since then, Blockbuster has shuttered hundreds of stores, Icahn has resigned from the board of directors and sold off most of his stake in the company, and the stock has been delisted from the New York Stock Exchange. Now investors wait to see if Blockbuster will be able to make a $42 million debt payment due on Sept. 30, which it has pushed back two times so far. But the company may not make it until then, as reports have surfaced that a bankruptcy filing could come any day. Still, the credits aren't rolling for the Blockbuster movie just yet -- and while this is one story that's unlikely to have a fairytale ending, it's destined to become a classic. --Written by Jeanine Poggi in New York. >To contact the writer of this article, click here: Jeanine Poggi. >To follow the writer on Twitter, go to http://twitter.com/jpoggi. >To submit a news tip, send an email to: email@example.com.