Shares of Blockbuster Inc fell sharply on Thursday, a day after the U.S. video rental chain said it had a weaker-than-expected holiday season, fueling concerns about its viability.

We believe Netflix and Redbox are capturing market share from Blockbuster at an accelerated rate, Wedbush Morgan analyst Michael Pachter wrote in a note to investors. We must question how long the company can continue as a going concern given its rapidly deteriorating performance.

Redbox, a provider of popular rental kiosks, is owned by Coinstar Inc .

Blockbuster's shares fell 23 cents, or 31.5 percent, to 50 cents in later afternoon trading on the New York Stock Exchange.

The once mighty U.S. video chain said on Wednesday it spent money in the fourth quarter to pump up inventory and to buy advertising to drive holiday sales that did not materialize.

In an interview on Thursday, Blockbuster Chief Executive Jim Keyes said he believes company measures to improve inventory and expand points of distribution such as through kiosks will take hold with consumers over time.

We recognize that changing direction and by providing (better) in stock (inventory) is not something that creates an immediate response, said Keyes. The consumer doesn't respond immediately but they do respond over time.

Keyes said he also believes a deal under which rival Netflix will wait 28 days to offer new releases by Time Warner Inc's Warner Bros is a plus for Blockbuster, which boasts a broader selection of new titles.

Netflix struck the deal with Warner in order to gain access to more of the studio's content for its streaming service.

Keyes would not provide guidance beyond the 2009 outlook.

Meanwhile, rating agency Standard & Poor's revised its outlook on Blockbuster to negative from stable, citing the extremely competitive home entertainment market and Blockbuster's dependence on studios, which are evaluating the traditional release window for movies and increased use of direct distribution technologies.

The company's bonds also fell sharply and were the most actively traded corporate bonds on Thursday, MarketAxess data showed.

Its 9 percent notes due in 2012 dropped nearly 30 cents on the dollar to 32 cents, yielding more than 68 percent, versus the 31.5 percent they yielded on Wednesday.

BLOCKBUSTER TROUBLES

Blockbuster said fourth-quarter and fiscal 2009 earnings would be sharply lower than expected, with adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) ranging from $195 million to $205 million for the year that ended on January 3. That compared with an earlier forecast of $270 million to $290 million.

Blockbuster is struggling to pare huge debt it inherited a decade ago when it was spun off from Viacom Inc , while trying to handle ever increasing challenges from Netflix and Redbox as well as Apple , Amazon.com , Google , Hulu and cable companies that have expanded video-on-demand offerings.

Blockbuster's stock has fallen from around $20 a share in 2003 to below $1 recently while Netflix climbed to $50.

The company, which already has sold off most of its international operations and may shut as many as 20 percent of its U.S. stores this year, plans to further reduce costs in 2010 and to remain conservative in its spending, Keyes said.

At year end, Blockbuster said it expects to have $247.2 million of cash and cash equivalents, including $59 million of restricted cash for its letters of credit.

(Reporting by Sue Zeidler; Editing by Robert MacMillan and Steve Orlofsky)

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