The Blockbuster app doesn't currently support HDMI output. There is an app called Real HDMI which will output a relatively low quality version of what's on the screen over the HDMI port. Apparently it's not available on the Market at the moment but I expect it'll be back or otherwise available soon.
The HDMI output supports any non-DRM content that you can play through the Gallery - so if you've converted your own DVDs it'll work great.