New offensive in DVD-by-mail war

Netflix shares torpedoed by Blockbuster's price cuts

Shares of Netflix Inc. were in free fall Tuesday after Blockbuster Inc. unveiled new lower-priced online rental subscription plans and an analyst downgraded Netflix to "sell" and cut his price target by $10 as a result.

The stock closed down 8.4% at $20.08 after going as low as $19.89 in intraday trading. The drop made Netflix the biggest decliner on The Hollywood Reporter Showbiz 50 stock index. During the past year, the stock has traded from $18.12-$30.

Blockbuster said Tuesday that it has decided to offer new online subscriptions under the moniker Blockbuster By Mail that are about $1 cheaper per month than its existing plans under the Blockbuster Total Access name but don't allow for the choice of online or in-store rentals all the time.

Movies returned to a store can't be exchanged for the free in-store rentals available to Blockbuster Total Access subscribers, but By Mail subscribers will receive a coupon good for one free in-store movie or game rental per month.

The company's most popular plan — allowing customers to have three films at any time — will cost $16.99 a month in its By Mail version, $1 less than in the Total Access offer. Its cheapest By Mail subscriber plan costs $4.99 per month, compared with $5.99 in the Total Access version.

"The online rental market is projected to increase 43% during 2007, and through Blockbuster Total Access and now Blockbuster By Mail, we intend to capture our share of that growth, broaden our customer base and remain the fastest-growing online rental service in the marketplace," said Shane Evangelist, senior vp and GM of Blockbuster Online.

Blockbuster By Mail allows subscribers to return online rentals by either mail or drop-off at a store. "This will allow subscribers to generally get their online movie(s) a day faster than if they had dropped the return movies in the mail themselves," the company said.

"While we believe Blockbuster Total Access offers the best value in the marketplace, we recognize some consumers may not live near a store or aren't interested in taking advantage of the free in-store rentals they can get through Blockbuster Total Access," Evangelist said.

As of April 1, the company had about 3 million Total Access subscribers, including about 2.8 million paying customers.

Meanwhile, Citigroup analyst Tiny Wible cut Netflix shares from "hold" to "sell" and reduced his price target from $25 to $15, arguing that the new Blockbuster products look "very much like Netflix's traditional product with price points on the most popular plans $1 below Netflix."

"The price cuts will likely increase the competitive pressures on Netflix and make it significantly more difficult to sustain earnings," he added.

Blockbuster shares closed down 3% on Tuesday to $3.95.
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