Netflix Faces a Scary Plotline
Investors hit the rewind button on Netflix Inc. shares Friday, sending the DVD rental company’s stock down 41% amid an intensifying price war.
The plunge came as rival Blockbuster Inc. disclosed plans to reduce its monthly fee to $17.49 for unlimited online rentals from $19.99. Blockbuster’s move followed Netflix’s announcement Thursday that it was slashing its fee for the same service to $17.99 from $21.99 starting in November.
Some observers believe that the price cutting has only just begun.
“The price-war impact will continue, and it will keep going down and down and down,” said Jerry Brandt, vice president of Adventist, a Boston strategy consultancy.
A Netflix spokeswoman declined to comment on the collapse in the company’s stock price or on Blockbuster’s action.
Analysts said that Netflix Chief Executive Reed Hastings told investors Thursday that the Los Gatos, Calif., company needed to cut fees because of competition from Blockbuster and the possible entry into the DVD rental market of online retail giant Amazon.com Inc.
He said that although the price reduction would eat into the company’s bottom line, relegating it to a break-even position next year, it would help Netflix’s subscriber base grow by 4 million and improve profit longer term.
Netflix is the nation’s largest DVD rental service online, with 2.2 million subscribers and a library of more than 25,000 titles. Customers use the Web to place their rental orders, then receive the movies in the mail. In the first nine months of this year, the company earned $16 million, or 25 cents a share, up from $4.2 million, or 7 cents a share, a year earlier. Revenue soared 90% to $362.3 million.
The market was obviously unconvinced that Hastings’ strategy would work. Netflix stock, which skyrocketed to a record high in January of almost $40, tumbled $7.13 on Nasdaq to a 16-month low of $10.30.
Analysts said that by cutting its fees so much, Netflix was leaving itself no resources to effectively market its services or to absorb any unexpected cost increases.
Meanwhile, Amazon looms as a potential threat. The leading retailer on the Web has distribution centers across the country and the marketing muscle to promote a DVD rental service, should it decide to launch one. Patty Smith, a spokeswoman for Seattle-based Amazon, said that although customers have asked the company to offer a movie-rental service, it had no plans to announce one at this point.
For its part, Blockbuster maintained that it would be able to turn a profit with its new pricing structure.
“We won’t be beat on price/value in the marketplace,” said Shane Evangelist, general manager of Blockbuster’s online operation.
Long the dominant force in video rentals, Blockbuster has struggled in recent years as consumers have opted to purchase DVDs from mass merchandisers such as Wal-Mart Stores Inc. and Best Buy Co. The company’s stock has dropped 58% this year. It closed Friday down 49 cents, or 6%, at $7.46 on the New York Stock Exchange.
The movie rental business is also under assault, analysts said, from the tremendous amount of entertainment viewing choices available to consumers.
DVD rental companies face “Wal-Mart on the retail side and on the rental side digital cable, video-on-demand, better satellite and TiVo,” said Jim Friedland, senior Internet analyst for investment bank SG Cowen. “They are in a situation where they are going to get attacked from all levels.”
Analysts said it might take until the end of this year to figure out whether Netflix’s price-cutting plan is starting to pay off.
“They have made a preemptive strike which may or may not be successful,” said Dennis McAlpine, an independent securities analyst who follows the company. “We won’t know until the [end of the] fourth quarter. If they get a good subscriber total, that will be a positive sign.”
Still, even if all the price cutting works for now, some question whether the business will be viable down the road.
“The rental of DVDs online is not a long-term or permanent” way of doing things, Brandt said. With so many other ways to obtain movies, including eventually downloading them from the Internet efficiently, he added, what Netflix and Blockbuster are engaged in may well be a “transitional business.”
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Times staff writer Chris Gaither contributed to this report.
