Blockbuster Inc. shares (BBI) continue to struggle, but not enough to help the bears who, in early October, had short positions amounting to 21 percent of the float. The stock reacted to the company’s report of an 8 cent-per-share loss, compared with a 10 cent consensus forecast, by rising 9 percent by early afternoon.

Another positive item of news was that the subscriber count for Blockbuster’s on-line DVD rental business reached 1.5 million, not so far from the ultimate goal of 2 million. The company hopes to gain a competitive edge versus on-line leader Netflix Inc. (NFX) by introducing a policy that allows customers that rend DVDs on line to return them in stores.

But can Blockbuster Online become a Netflix killer? This isn’t like Microsoft Corp. (MSFT) or Sony Corp. (SNE) trying to attack Apple Computer Inc. (AAPL) with iPod killer. These companies could improve their fortunes by taking a bite out Apple’s growing downloadable music business, it’s not as if failure threatens their viability.

We’re not sure the same could be said of Blockbuster. In an Oct. 25 research report, Richard Ingrassia, who follows Netflix for Roth Capital Partners, claims Netflix management envisions “the closing of almost all video stores in the U.S., 5-10% of them next year, and a Netflix capture rate of 2:1, in our opinion.” Ingrassia also cites channel checks that “make it clear that Blockbuster’s online operations remain woefully inferior to Netflix.”

Maybe some number of video stores will survive, with, perhaps, a slight change in business model to encompass sales of other products. Perhaps Blockbuster Online will will capture more than one-third of new internet signups… Time will tell. But the extinction of video stores and/or a small share of new online business would not go over well in a company with a debt-to-capital ratio above 50 percent, compared to Netflix, which is debt free.