Rival Blockbuster cuts into profits

Shares of Netflix sank Thursday after an analyst wrote that competition from Blockbuster was pushing the online DVD rental service to step up profit-eating promotions.

The Los Gatos, Calif.-based company’s stock fell $1.03, or 3.7%, to $25.62 in early afternoon trading on the Nasdaq, giving back gains from the previous session.

Wedbush Morgan analyst Michael Pachter wrote in a note to investors that Netflix “has become increasingly promotional,” cutting prices of its lowest-cost plan in the face of increased competition from Blockbuster, the nation’s biggest in-store video rental chain.

On Wednesday, Blockbuster announced it ended 2006 with 2.2 million online rental customers, thanks to its Total Access program, which lets customers rent DVDs on the Web, then return them in stores.

“Netflix is likely testing ever-lower pricing in order to maintain subscriber growth,” Pachter wrote, noting that the company slashed its bottom-tier subscription plan from $5.99 per month to $4.99, and started offering one-month free trials, up from two-week free trials.

The analyst maintained a sell rating and $15 price target on the stock, implying a 43.6% decline from its closing price Wednesday of $26.61 on the Nasdaq.

He added that Netflix is approaching market saturation for its rental service, and wrote that the company will need to control costs and limit subscriber turnover to stay profitable.

“We continue to be skeptical about the Netflix business model and do not believe that the company will ever approach its long-term goal of 20 million subscribers,” Pachter wrote.

Shares of Blockbuster added 7 cents to $5.70 in midday trading on the New York Stock Exchange. Earlier in the session the stock hit a new 52-week high of $5.79 — its second new peak in as many days.

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