Online rivals bring brutal end to Blockbuster story

Enjoy the neon lighting and over-priced junk food while you can.

Blockbuster, the video rental chain which at one time seemed to have a blue-and-yellow presence in every strip mall in America, is teetering on the brink of collapse and may file for bankruptcy in the US as early as next month.

In a move that may represent the final nail in the coffin for the neighbourhood video store, the firm's executives are said to have held meetings this week with all six of the so-called "major" Hollywood studios at which they unveiled plans to enter a pre-planned insolvency in the middle of September.

Declining public appetite for DVD rentals, together with increased competition from mail-order rivals such as Netflix, the US version of LoveFilm, have destroyed the firm's business model. It has lost $1.1bn (£710m) since the start of 2008, and was forced to shutter more than a thousand of its American outlets in the past year alone.

The company now has roughly 3,500 US stores left, making it the country's last major franchise to remain in existence (its nearest rival, Hollywood Video, went under earlier this year). It has recently been sorely hurt by a growing number of vending machines which rent films for as little as a dollar a day.

Adding to the woes of every DVD rental business in recent years has been an explosion in the number of consumers streaming movies online, either illegally or through legitimate sites such as iTunes. It means that video stores now seem as threatened as high-street music shops.

The Los Angeles Times reported yesterday that executives for the Dallas-based firm met with the film studios, who are among their biggest creditors, seeking their blessing for the Chapter 11 bankruptcy which will allow them to restructure their business to make greater use of the online market. At present, it has a billion dollars in debt.

For investors, the speed of its decline from cultural phenomenon and stock-market darling to near insolvency has been sobering: shares fell from eleven cents to seven cents yesterday. At the start of the year they were trading at $1.50, and as recently as 2007 they cost nearer ten dollars. The company's total value today is $24m; in 1994, former owner Viacom bought it for $8.4bn.

Insolvency would virtually wipe them out. But it might also give Blockbuster short-term financial breathing room that would allow it to shut another 800 stores, launch its own range of cheap rental kiosks, and begin competing in the online video-streaming market.

Hollywood is already feeling the effects of a disappointing summer at the box office, while it has for years been suffering from huge declines in the once-lucrative DVD sales market, down roughly 40 per cent from its historic peak. Studios are therefore thought to be generally supportive towards Blockbuster's long-term survival plans, and may even help to subsidise them.

Across the pond, the firm insists that none of these potential developments will affect UK operations. Its 640 British stores have been hived off into a financially independent business, and management claim they are a "separate legal entity" with a bright future.

However the firm's UK boss, Martin Higgins, may not be the most reliable of crystal ball gazers: earlier this year he insisted to reporters that it was "unlikely" that the US business would ever enter bankruptcy.

Sympathy for the longstanding behemoth may be tempered by its history of putting local video rental stores out of business when it began its rapid expansion after the first branch opened in 1985.

The founders opened new stores every 17 hours, willingly enduring significant losses in particular branches to drive competition out of the market and ensure their own dominance.