Blockbuster (BBI) is a perfect example of what can go wrong when you misread the industry trends and then realizing it, try desperately to catch up. In the period from late 2001 to 2002, Blockbuster was the leader in the video rental business. Its shares were trading at nearly $30 a share and its market-cap was at around $5.75 billion.

But there was a trend developing towards movie rentals via the Internet. Blockbuster failed to recognize the growing significance of Internet video rentals, a very poor miscalculation on its part. The shares have steadily declined to the current $3.80 to $4.20 channel. Once a large-cap, Blockbuster is now a small-cap and struggling to regain any sense of direction. The company has entered into the Internet DVD rental business but it has a lot of catching up to do.

Fundamentally, Blockbuster has lost money in the last three straight quarters and struggling to grow its revenues, which are forecasted to increase a mere 1.1% in fiscal 2006. Its estimated five-year earnings growth rate is a mere 2.5% per year, which is pitiful.

Blockbuster also has to deal with its massive debt load of $1.27 billion or a debt-to-equity of 2.73:1, which suggests a weak balance sheet. Couple this with poor working capital and you understand the high financial risk. Faced with stagnant revenue growth and losses, Blockbuster faces a difficult upside battle to regain its lost glory. The odds are stacked against it.

In the face of Blockbuster is online DVD rental company Netflix (NFLX), which debuted in May 200, trading at close to $40 in 2004 before sinking to the $10 level in 2005 before the rally.

Netflix saw the future for DVD rentals and it was online and not via the