Nebraska Book Company emerges from Chapter 11

In a press release, Nebraska Book Company reports that it has completed its restructuring and emerged from Chapter 11. The company reports that it has acquired 23 college bookstores since entering Chapter 11, the latest being Portland State University Bookstore.

The bankruptcy lessened, but didn't eliminate, the company's debt load; Nebraska Book went into Chapter 11 with $450 million in debt and emerged with $230 million. $100 of the company's debt was converted from notes into equity. (Why couldn't the company get creditors to agree to convert 100% of the debt into equity? Was it that creditors didn't have faith in the company going forward? Would the company have to have gone into Chapter 7 in order to eliminate all the debt?) The company's debt load coming out of bankruptcy is still significant, and it's entirely possible that another bankruptcy is in the future unless Nebraska Book can turn its business around dramatically. Simply buying a few college bookstores here and there is unlikely to be enough to protect the company from the long-term changes in the college textbook business.

Blockbuster: Pass reorganization, head directly to liquidation?

In court filings yesterday and today, several parties to Blockbuster's bankruptcy plan filed objections. According to the Los Angeles Times, the objectors include "Walt Disney Studios, Universal Studios, landlords, unsecured creditors, other parties and the office of the U.S. Trustee, a Justice Department unit that oversees bankruptcy proceedings." The problem is that the plan filed on February 21st for the sale of the company to four major secured creditors for $290 million would give the buyers the right to determine who receives the proceeds of the sale. Unsecured creditors, such as the movie studios and landlords that own Blockbuster's stores, would get little or nothing.

It's not a surprise that the unsecured creditors objected to the sale, but when the U.S. Trustee also objected, it made it much more likely that the court will take the matter very seriously. According to the Wall Street Journal, the unsecured creditors would prefer that the court convert the proceedings to a Chapter 7 liquidation, rather than allow the sale to go ahead as proposed. As a practical matter, it's very difficult to see how Blockbuster could survive without the support of the movie studios and distributors. It's their movies and television shows that Blockbuster rents, and if they refuse to supply product to the reorganized Blockbuster, it would cease to be a viable business.

Blockbuster could still modify the sale proposal to satisfy its unsecured creditors and the U.S. Trustee, but it's looking increasingly likely that Blockbuster will end up in liquidation.

Blockbuster enters Chapter 11 bankruptcy

As expected for months, Blockbuster has entered Chapter 11 bankruptcy in the U.S., and its equivalent in several other countries. Blockbuster says that its 3,000 U.S. stores will continue to operate as usual during the bankruptcy (but that's probably not true--see below). In addition, its video kiosk business is owned by NCR and isn't part of the bankruptcy.

Blockbuster has asked the Bankruptcy Court to allow it to give the movie studios and distributors that supply it with 80% of its revenues priority for repayment, so that they don't cut off the company's ongoing supply of content. Senior bondholders, including Carl Icahn, who bought approximately one-third of the company's bonds as of September 17th, will be compensated with common stock after the company is reorganized and will effectively own the company. Other creditors and shareholders, with the exception of the movie studios and distributors, will be wiped out by the bankruptcy.

Blockbuster will most likely use the bankruptcy to cancel the leases, layoff the employees and close many of its more poorly-performing stores. It will also use the bankruptcy to renegotiate leases for other locations, and possibly lower or eliminate some benefits and pensions. The company's hope is that by wiping out its debt and lowering its operating costs, it will be able to compete more effectively with Netflix and Redbox. However, given how far behind those two companies it is, it's hard to see how Blockbuster can catch up.

iRex is back as IRX, will fail again

iRex Technologies, a bankrupt vendor of overpriced eBook readers, has arisen from the dead, stripped the "e" from its name to become IRX Innovations, and plans to get back into the eBook reader game, this time selling overpriced eBook readers to the business and enterprise market. (That was Plastic Logic's business model, and we've seen where that got them.)

iRex (or IRX) is following a time-tested strategy--if you try to sell your offering to the business-to-consumer market and fail, switch to a business-to-business "white label" strategy and try again. The problem with this approach is that businesses aren't stupid; they see perfectly good eBook readers from Amazon selling for $139 and wonder, rightfully, why they should pay more than that. If IRX prices their readers closer to the iPad, they'll lose. So, I don't see what IRX is going to bring to the market that will allow it to survive in the "valley of death" between the Kindle at the low end and the iPad at the high end.

The rats are running for the lifeboats at Blockbuster

Home Media Magazine reports that Mark Wattles has sold more than 1.7 million shares of Blockbuster stock for a grand total of $230,741, or an average price of just a little over $0.13 per share. Blockbuster CEO Jim Keyes sold more than 245,000 shares at a price of $0.18 each, for a total of $44,100. According to the article, he still holds more than 1.8 million shares, which if valued at what Wattles got for his sale, would be worth a bit more than $234,000.

Blockbuster's stock has been delisted by the New York Stock Exchange and its biggest holders are dumping their shares while they still have some value. Even though the company claims to have avoided bankruptcy through a one-month reprieve in debt payments from creditors owed $440 million of the company's $920 million in total debt, Wattles's and Keyes's stock sales indicate that they don't believe that the company will be able to stay out of bankruptcy court. Based on first-quarter earnings, the company is on track to have less than $100 million in earnings this year before interest, taxes, depreciation and amortization--not enough to cover scheduled interest and principal payments on its outstanding debt.

Pivots: Getting it right the first time

Veoh's bankruptcy and liquidation announcement last week was no surprise for people who had followed the company for years. Veoh raised $70 million dollars in venture funding from mid-2005 to its demise. Its bankruptcy was triggered when the company could neither raise more money nor find an acquirer.

Veoh was somewhat unusual in the online video space, in that it followed the same basic business plan from launch to death (although, as Dan Rayburn pointed out, the elements of that business plan changed like the wind)--an advertising-supported business that aggregated content for consumers. A far more common path for online video startups is to begin as an advertising-supported content aggregator (either user-generated or professionally-produced content), and when that doesn't work, change direction (pivot) and take some portion of their technology--content management, encoding, video players or advertising delivery--and market it to businesses on a "white label" basis. When that plan fails (as it usually does), the company is either sold to an acquirer or shuts down.

An excellent example is Joost, which launched in late 2007 with a blizzard of hype as an advertising-supported content aggregator. It dropped its consumer-oriented services and shifted to offering white-label video distribution services to business in the summer of 2009. After burning through $45 million in outside investment and untold millions more from its founders, it was sold for a few million dollars to November 2009.

One lesson from all this is that pivoting will not necessarily save your business. The Lean Startup and Customer Development movements emphasize agility and quick changes to your business plan over taking the time at the outset to insure that you're targeting a real market opportunity and not a mirage. This works very well early on. However, once you staff up and raise a significant amount of outside investment, it's easy to find yourself trying to make a broken business model work for far too long. By the time you pivot, it's too late. Your investment, technology and user base become an "anchor" that defines the businesses that you can pivot into. In the case of online video, you end up pivoting from quicksand into a desert.

It's essential to take the time upfront to get your product/market fit right, and to insure that you're pursuing a real market and not a mirage. You may have to change direction a lot in the first few months of operation, as you learn more. It's much better to recognize early that you're going in the wrong direction and make changes, than to try to make mid-course corrections to a speeding locomotive. Once you've raised funds, staffed up and built your infrastructure, inertia and ego kick in, and fundamental changes to your direction will become almost impossible.

Thus this warning: Pivot early and often (if you have to), because you probably won't be able to successfully pivot later on.

Circuit City files for Chaper 11 Bankruptcy

According to Dealerscope, Circuit City filed for Chapter 11 Bankruptcy this morning. In a written statement, the company said that it plans to reorganize and remain in business. That may be the company's intent, but the odds of successfully emerging from Chapter 11 are increasingly slim for retailers. For example, Sharper Image initially filed for Chapter 11, but within a few weeks the company modified its filing to Chapter 7 and liquidated. Mervyns, a chain of department stores, filed for Chapter 11 last July, and then a few weeks ago, it filed for Chapter 7 liquidation and is now going out of business.

Circuit City may beat the odds, but I think it more likely that we'll see many more than the 155 stores already running "going out of business" sales close their doors before the end of the holiday season.