Why Blockbuster's Bankruptcy Could Be Bad for Redbox

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UPDATE: Want to see a guy who actually knows what he's talking about blow a hole in my theory? Read on.

You'd think the news that Blockbuster -- that relic from a bygone era when you actually had to talk to people in order to rent a movie -- is likely filing for bankruptcy in September would mean good things for Redbox. The DVD vending machine company has been taking bites out of Blockbuster's business one $1 movie at a time for years. Now, along with Netflix, it finally seems to have devoured the beast. But could this actually be a bad thing for the company, which is owned by Bellevue-based Coinstar?

In human terms, Blockbuster's bankruptcy will be catastrophic. Think of it as a crash diet: the goal is to shed as many pounds (stores and people) as possible. Which may be part of the reason why no Blockbuster employee within a 15-mile radius was willing to talk to me today, even anonymously. Beyond the standard corporate-wide gag order, it's just not fun to dish when there's a good chance you'll soon be unemployed.

But ignoring the significant collateral damage, Blockbuster should emerge from Chapter 11 leaner and meaner. And it's told Hollywood that, post-bankruptcy, it wants to focus on its streaming and kiosk businesses, potential threats to Netflix and Redbox respectively, which is something Hollywood wants to hear.

Redbox has a substantial lead coming out of the gate, with roughly 20,000 more machines in grocery stores and Wal-Marts. But the studios (a.k.a. the people with money) have an interest in keeping Blockbuster ambulatory, since competition is the best way to keep prices low. Furthering its advantage, Blockbuster doesn't have to wait a month to release DVDs, as Netflix and Redbox do.

Bad news for Redbox, however, could be good news for you, the guy or gal who likes their movies and likes them cheap and easy to get. Unless, of course, you work for Blockbuster. In which case, my condolences. And, call me!

UPDATE: Michael Pachter of Wedbush Morgan Securities, a guy who's actually paid to analyze this business, says that, contrary to what I claimed, Blockbuster's bankruptcy is very good for Redbox.

"In bankruptcy Blockbuster is going to be managed to generate as much cash as possible. They're going to cut out all marginal stores, defer maintenance, order less inventory and take a long route to liquidation," he says. "The only way Blockbuster can be more profitable is to be smaller. And a small Blockbuster means more displaced consumers, which means more opportunity for Redbox."

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