DALLAS – Blockbuster Inc. (BBI) says it will undercut rival Netflix Inc. (NFLX) on the price of renting DVDs over the Internet, and the stock of both companies fell Friday — Netflix shares plunged 41 percent — as investors reacted to a budding price war.
Netflix announced late Thursday that it would cut its monthly subscription for DVD rentals to $17.99 from $21.99 on Nov. 1 and expected only to break even next year because of tough competition. That would make Netflix cheaper than Blockbuster, which charges $19.99 a month.
It took Blockbuster less than 24 hours to respond. On Friday, chief executive John Antioco said in an interview that later this month Blockbuster will cut its price to $17.49 for customers who keep up to three DVDs out at a time.
The price war broke out less than two months after Dallas-based Blockbuster, the world's largest movie-rental company, jumped into the online-ordering, mail-delivery DVD business that Netflix pioneered.
"We're flattered that it has only taken them seven weeks to blink," Antioco said.
Several analysts downgraded Netflix's stock Friday, saying the price cut would hurt the company's profitability.
Shares of Netflix plummeted $7.13 to $10.30 on the Nasdaq Stock Market (search). Blockbuster shares fell 49 cents or more than 6 percent, to $7.46, on the New York Stock Exchange (search). They have dropped 66 percent in the past year.
Netflix said it had 2.2 million customers as of Sept. 30, including 590,000 new trial customers in the previous three months, and had raised prices in June by about $2 a month.
Netflix CEO Reed Hastings, discussing his price cut, said Thursday that he learned from several sources, whom he didn't identify, that Internet retailer Amazon.com is likely to start online DVD rentals. Amazon hasn't announced whether it will, but Wal-Mart Stores Inc. (WMT) already offers the service.
Blockbuster won't say how many subscribers it has on the online service, and Antioco also declined to say whether the price-cutting would reduce the company's earnings.
Antioco said Blockbuster had not planned to cut prices; he suggested that Netflix's move left it no choice.
"In some ways, doing nothing is the worst thing," Antioco said. "It would be a bigger omission not to respond."
Antioco said Blockbuster would continue to give subscribers to the online service two coupons per month for free rentals of movies or games at its stores and also will give them discounts on buying new or used games and movies.
Harry Katica, an analyst with Aperion Group LLC, said competition from Blockbuster forced Netflix to cut prices, and that the lower prices aren't sustainable.
"Any type of aggressive pricing is temporary," he said. "I don't think any of these businesses can survive at $17 a month."
Katica said Los Gatos, Calif.-based Netflix is in the much weaker position because its lone offering — Internet ordering and mail delivery of DVDs, is a commodity that rivals can undercut on price. "They're either going to give up or go out of business," he said.
Media giant Viacom Inc. recently completed selling off its majority stake in Blockbuster.
Blockbuster has been hurt by low-priced DVDs for sale at retailers such as Wal-Mart. Antioco is trying to rebuild the company as a place to buy, sell or rent movies or games in stores or on the Internet.