Blockbuster offers cheaper plans for online rentals

Blockbuster Inc. is offering lower-priced plans for online movie rentals as it competes with Netflix Inc. in a market that some analysts believe could grow more than 40% this year.

Dallas-based Blockbuster said Tuesday that it would cut prices $1 a month for customers who order movies only online and not at stores.

Analysts said Netflix could be forced to drop prices, which would reduce its profit.

Shares of Netflix tumbled $1.85, or 8.4%, to $20.08, while Blockbuster shares slipped 12 cents, or 3%, to $3.95.

Blockbuster said it would offer a plan letting customers place online orders to rent three movies at a time for $16.99, a buck cheaper than its most popular Total Access plan. The movies are mailed to the customer.

The difference is that customers on the cheaper plan, called Blockbuster by Mail, won’t get a free rental by returning DVDs to a store instead of mailing them back. They will, however, get a coupon for one free in-store rental per month.

Blockbuster said it would offer more limited plans, such as two movies a month for $4.99.

Netflix charges $17.99 for a three-out-at-one-time plan, and it has begun throwing in movies streamed over the Internet for customers with high-speed access and a Windows-based computer. It also has a $4.99 plan for up to two rentals a month.

Michael Pachter, an analyst at Wedbush Morgan Securities, said Blockbuster’s cheaper offer put Netflix on the spot.

“They can cut prices, which will kill their profitability, or they can do nothing and watch their subscriber growth wane,” Pachter said.

A Netflix spokesman declined to comment on pricing.

Citigroup analyst Tony Wible downgraded Netflix shares to “sell” from “hold,” saying that Blockbuster’s price cuts would make it “significantly more difficult” for Netflix to sustain earnings.

Netflix doesn’t operate stores, but it got a head start in the Internet ordering and mail delivery of DVDs and boasts more online subscribers than Blockbuster. But Blockbuster is growing faster.

Adams Media Research estimates that the online rental market will grow 43% this year.

“There is a segment of customers who only want to rent online,” Evangelist said. “We think this will attract customers from other stores and other online rental competitors.”