Blockbuster Undercuts Rival Netflix

Blockbuster Video announced Tuesday that they will begin renting movies to on-line customers for a dollar less than before. Blockbuster hopes the new plan will win new customers, while at the same time start cutting into the on-line superstore Netflix's member base.

The Associated Press reported that the new Blockbuster plan will be on-line only, which means customers will not get the same price should they choose to continue to rent movies at a Blockbuster Store.

Called "Total Access," customers will be able to order up to three movies at a time, for $16.99 a month, with free shipping to and from the customer's house. They also have plans to offer a "limited plan," allowing users to have up to two movies a month for $4.99.

Analyst say the move may force rival Netflix to lower their rates as well, which would in turn lower their profits. Netflix has already taken an 8.4 percent loss on the stock market this year, leaving a single Netflix share at $20.08. However, compared to Blockbuster's share price of $3.95, things aren't so bad.

"They can cut prices, which will kill their profitability, or they can do nothing and watch their subscriber growth wane," said Michael Pachter, an analyst with Wedbush Morgan Securities.

The move by Blockbuster to become the cheapest on-line retailer of movies, leaves Netflix sitting on the same "Three At Once" plan at a price of $17.99. This makes things significantly more difficult for Netflix.

While Netflix got it's foot in the door first in the Internet ordering business, it's member base is slowing, while Blockbuster's is growing. However, Netflix does not have the added operation costs of brick and mortar stores to deal with.

Analysts believe that the online rental market will grow by as much as 43 percent by the end of 2007. So while Blockbuster may be losing money at the moment, Chief Executive John Antioco has said that he believes they will be profitable by this time next year as the number of Internet orders rises.

In the first quarter of this year alone, Blockbuster added 800,000 new subscribers, beating out Netflix who only added 487,000 to their member base.