Blockbuster makes a move
Blockbuster tried Wednesday to take some of the joy out of Christmas for rival Netflix by again slashing the price of its online rental subscription, this time to just $14.99 a month.
Discount makes Blockbuster’s online offering $3 a month cheaper than that of Netflix, which goes for $17.99, and sent shares of the online rental pioneer plunging more than 7%.
Despite seeing an initial bump, Blockbuster ended the day down 2.8%.
Price cut was the second in three months for Blockbuster, which has gone from an initial price of $19.99 to $17.49 and now $14.99.
Analysts who have followed the price war between old-guard Blockbuster and new-guard Netflix speculated that Netflix would have little choice but to respond in kind, although a Netflix rep denied any such plans.
“It was always our plan to get more competitive on price once we made sure we had the operational side figured out,” Blockbuster online VP-general manager Shane Evangelist said.
Dallas-based company said it was expanding its online inventory to 30,000 titles from 25,000.
It’s the second major change in business Blockbuster has announced in recent days. Earlier this month, company said it is scrapping its late-fee structure.
On the same day that Blockbuster announced the scheme, billionaire corporate raider Carl Icahn revealed that he wants Blockbuster to buy up brick-and-mortar rival chain Hollywood Entertainment and disclosed that he has bought up enough shares to make him the largest stakeholder in each chain.
On Wednesday, Netflix shrugged off any impact from Blockbuster’s latest salvo.
The battle for online subscribers underscores the dramatic shifts in the video rental biz over the past two years.
The popularity of cheap DVDs has taken people out of Blockbuster and into Wal-Mart and Best Buy, putting pressure on the rental giant’s bottom line.
Netflix also introduced people to the joys of no late fees — long a sore point for Blockbuster customers — siphoning more people out of stores.
“We see (Blockbuster’s price cut) as another sign of the death of the bricks-and-mortar video rental business,” the Netflix rep said. “Clearly, they see a lot of people moving online.”
Netflix cut the price of its basic subscription package from $21.99 to $17.99 in September.
At the time, Netflix CEO Reed Hastings said the price cut was a preemptive move against the expected entry of online giant Amazon.com into the DVD rental arena.
Analysts speculated that Blockbuster’s latest move also could be aimed at Amazon.
Dennis McAlpine of McAlpine & Associates said, “I’d certainly be scared if I were Amazon. But meanwhile, they’ve lowered the profitability for everyone, including themselves.”
Since its splitoff from Viacom earlier this year, Blockbuster has been racing to catch up with market trends.
It’s pushing aggressively into vidgames and movie and game trading in an effort to lower its dependence on basic movie rentals.
In its boldest move, Blockbuster also made a $1 billion bid to acquire Hollywood Video.
As further indication that Blockbuster is making fundamental changes to its online strategy, company said it would more than double the number of distribution centers from which it mails out DVDs to 23.
This suggests the emphasis is shifting away from an integrated in-store/online approach in favor of building a stand-alone online operation to rival Netflix.
“To date, more than half of our online customers are new to Blockbuster or reactivated, meaning they have not shopped at our stores in the past six months,” Evangelist said. “Plus, through the two free monthly store rental coupons offered to online subscribers, we are giving those customers an incentive to come into our stores, where they’re discovering new offerings, like trading and games.”
As originally sketched out by chairman-CEO John Antioco, Blockbuster’s online plans called for relying on the chain’s 5,000 U.S. stores as shipping points rather than building dedicated distribution centers.
Evangelist denied the plans have changed.
“We will still be shipping out of the stores, but in the meantime we want to make sure we can deliver the highest quality service,” he said. “We’ve discovered that a high percentage of the titles our online customers want to watch are ones that we don’t generally stock in our stores, and we wanted to position those titles around the country. It’s really a different customer set than our in-store customers.”
Netflix shares closed at $11.70; Blockbuster closed at $9.40.