Netflix Inc will not cut its price for online DVD rentals to match lower fees set Wednesday by rival Blockbuster Inc. in an escalating battle for online subscribers, Netflix Chief Executive Reed Hastings said.
Blockbuster, the largest U.S. video rental chain, said it was cutting the subscription price for its online rental service by $2.50 to $14.99 a month plus tax effective immediately, guaranteed through January 2006.
The move came as Blockbuster grapples with growing online competition from Netflix. and giant discounter Wal-Mart Stores Inc. , and the threat that Amazon.com Inc will bring its new U.K. online service to the U.S. market.
Hastings told Reuters Blockbuster’s move shows it recognizes online rentals may make its huge network of retail stores obsolete.
“In my view, Blockbuster just killed the video store by offering $15 pricing for online, but maintaining $25 a month for store-based subscriptions,” Hastings said. “They are telling their customers to go online.”
Hastings said Netflix knew that Blockbuster was testing a lower price but believed it would have little impact on subscriber loyalty because Wal-Mart has offered a lower rate for several months.
“We have no plans to change our price,” he said. “This low price will help Blockbuster online but it may also help Netflix by converting store-based renters into online renters.”
Netflix charges $17.99 a month for online rental subscription while Wal-Mart offers a $15.54 subscription.
Blockbuster’s monthly subscription entitles customers to unlimited rentals, three movies out at a time, with no due dates, no late fees with postage included. Subscribers also receive two free in-store movie or game rentals a month.
Its competitors’ services have similar conditions.
Blockbuster said from mid-January, its online unit would have 23 distribution centers, more than doubling its capacity from August, 2004 when it launched the service.
Shares of Netflix closed down 7.14 percent, or 90 cents, at $11.70 on the Nasdaq Wednesday but rose to $11.80 in after-hours trade on the INET.
Blockbuster shares ended down 2.79 percent, or 27 cents, at $9.40 on the New York Stock Exchange but were up slightly, to $9.42 in after hours trade on the INET.
Research Associates analyst Marla Backer, who had a “sell” rating on Blockbuster stock, cautioned investors to “avoid exposure to this (rental) sector” because of the intensifying price competition.
In a note to clients, Backer said the price cut may indicate that Blockbuster underestimated Netflix’s strength as the innovator of online DVD rentals, or it may believe Amazon.com Inc , which just launched a rental service in the United Kingdom, will enter the U.S. market in 2005.
Backer also said it was unclear whether revenue lost in the price cut would be offset by savings in fulfillment costs from Blockbuster’s new distribution centers.