Video chain Blockbuster Inc on Friday said it would lower the price of its online DVD rentals to undercut a similar move by Netflix Inc that sparked a stock a sell-off of both companies' shares.
The cuts caused talk on Wall Street of an impending price war in the still-growing business that Netflix pioneered but has been joined by Blockbuster, Wal-Mart Stores Inc. and could soon see the entry of Amazon.com Inc.
Blockbuster Chief Executive John Antioco told Reuters the company would reduce the monthly subscription price for online DVD rentals to $17.49 from $19.99, and the move would become effective "the week after next."
He said the 12.5 percent reduction came in response to Netflix's announcement one day earlier that it would cut its monthly subscription fee to $17.99 from $21.99 in an attempt to double its subscribers to 4 million by the end of 2005.
"We were growing our business at a very nice clip, but would not have elected to lower our prices. Having said that, we are determined that we are not going to be beaten from a price/value perspective," Antioco said.
Blockbuster, which operates nearly 9,000 retail stores world-wide, launched its online business in August.
Netflix officials had no immediate comment on the answering volley from their bigger rival.
"This is really new for us. We have to digest a bit before we can make a comment," said Ted Sarandos, Netflix chief content officer.
Shares of Netflix tumbled 41 percent on Friday as its move to stave off competition raised questions about the long-term effect of price reductions in the arena.
Netflix said the cut and added competition would lead to break-even results for 2005. Its shares, which had skyrocketed to a record high last January of almost $40, fell to a 16-month low and closed at $10.30 on the Nasdaq.
Blockbuster's shares also fell, closing down 49 cents, or 6.2 percent, at $7.46 on the New York Stock Exchange. Both were little changed in after-hours trading on INET.
Wall Street analysts said Netflix's plan was risky, and several downgraded their opinions of its stock.
Wedbush Morgan Securities analyst Michael Pachter said its prospects for succeeding were limited due to slim profit margins that may not leave room for marketing or cost increases that bigger rivals could easily absorb.
"The little guy is not the one that is supposed to start the price war," Pachter said.
Sarandos countered that Netflix planned for contingencies and saw no coming increases in DVD acquisition costs.
"The exciting thing for people to keep in mind is the online rental space is going to get bigger," Sarandos said. He declined to comment on whether the cut would be permanent.
Tom Adams of Adams Media Research saw a price war as a potential means to attract more of the 105 million US households with DVD or video players to the nascent industry.
"The one thing holding back growth to these services is the prices...a price cut to $18 is extremely significant and could make up for the loss of revenue," Adams said.
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