Netflix falters in battle with Blockbuster

Blockbuster Inc. is finally getting some payback in its battle with rival Netflix Inc.

For years, the video store giant has watched its market share eaten into by the online DVD renter. On Wednesday, however, Netflix disappointed Wall Street with its quarterly earnings, saying Blockbuster’s cutthroat competition was slowing its growth.

Although Netflix’s revenue rose 36% from a year earlier, to $305.3 million, the online pioneer saw its earnings -- $9.9 million, or 14 cents a share -- fall 2 cents below the consensus estimate among analysts. Chief Financial Officer Barry McCarthy described it as the most disappointing quarter since the company went public in May 2002.

Shares of Los Gatos, Calif.-based Netflix tumbled $2.26, or 9.43%, to $21.70.

Founder Reed Hastings acknowledged that the fight for new subscribers had intensified, with some preferring the variety of options provided by Blockbuster, which supplements its retail network with an online business. But he maintained that Blockbuster’s approach is a money loser that cannot be sustained.

“Obviously, when you quite literally give away the store you are going to see both share growth and market growth,” Hastings said during a call with analysts and reporters. “We are continuing to improve our service levels and reduce our costs.”

Blockbuster, which has struggled for years to find its niche online, is finally seeing a turnaround in its business.

Both Netflix and Blockbuster offer online services for $17.99 a month. But late last year, Dallas-based Blockbuster began offering its online subscribers the option to return and check out some DVDs in its stores at no additional cost.

Netflix has seen some subscribers flee as a result because all its DVD deliveries are made through the mail -- a limitation that means subscribers have to wait at least two days before receiving a new movie.

“Customers are no dummies,” wrote MarketWatch analyst Herb Greenberg on his blog. “They obviously like the combination and flexibility of mixing bricks-and-mortar with online.”

But Youssef Squali, an analyst with Jefferies & Co., said Blockbuster probably would need to raise its prices.

“We believe it’s a question of when, not if, Blockbuster raises Total Access prices, as their current pricing is clearly not sustainable,” Squali said in a report. “When they do, Netflix’s growth should re-accelerate.”

Netflix signed up 487,000 additional subscribers during the first quarter, a 30% drop from 687,000 new customers at the same time last year. Blockbuster isn’t scheduled to release its first-quarter numbers until May 2, but its management previously said the company’s online service would lure 800,000 more customers during the first three months of the year.

Michael Pachter, an analyst with Wedbush Morgan, said that it took a while for Blockbuster to establish a successful online program but now it is a force.

“The real wild card is when Blockbuster changes management what does the new guy do,” he said. “I would expect they don’t let up at all. They have too much to gain by putting Netflix out and too much to lose by dropping Total Access.”

Shares of Blockbuster slipped 2 cents to $6.44.

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lorenza.munoz@latimes.com