Netflix lowers fees in attempt to gain market share

Posted Jul 23rd 2007 9:41AM by Brian White
Filed under: Products and Services, Netflix, Inc. (NFLX)

Faced with increased competition from Blockbuster Inc. (NYSE: BBI) and other online download movie distributors like Amazon.com Inc.'s (NASDAQ: AMZN) Unbox service, Netflix Inc. (NASDAQ: NFLX) has said that is lowering the monthly price of two of its most popular DVD rental subscriptions. If a customer keeps three DVDs rented at a time, the price will now be $16.99 per month, with $8.99 as the cost for a single DVD rented out at any given time. Both plans were previously $1 higher in price.

Will this cause more customer loyalty among the online DVD rental faithful? I'm not sure a single dollar is what is needed here as anybody can compete on price. Can Netflix really absorb these price cuts, anyway? These two plans, which are used by a majority of the company's 6.8 million subscribers, will have an immediate impact on Netflix's revenue starting today. As always with price cuts, the strategy will need to make up the loss in revenue with more revenue coming from subscriptions (new or existing). Netflix will really need to recruit new customers. Not to mention these are not new pricing schemes -- competitor Blockbuster already has them.

What Netflix may need is some kind of other competitive advantage. How will Netflix differentiate itself? It must find an angle if it wants to increase that all-important subscriber rank. With NFLX shares down 24% this year and indicating down over 8% in premarket trading this morning (9:00 a.m.), this may be the most important decision it makes all year.

Netflix also reports Q2 numbers today, so this subscription announcement was probably carefully planned timing-wise (Friday) although it didn't seem to soothe shareholder fear. The competition is not slowing down a bit.

Tags: Blockbuster, DVD rentals, DvdRentals, inthenews, Netflix, NFLX

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Reader Comments (Page 1 of 1)

7-23-2007 @ 11:44AM

Steve said...

Hey Brian,

I think it's a matter of fundamentals. Netflix is in much better position fundamentally to out-compete Blockbuster on price. They carry no debt and are solidly profitable, vs. Blockbuster which is hemmoraging money on Total Access trying to build a customer base, and is already deeply in debt. The competitive advantage here is simple: better fundamentals. In a war of attrition, the better supplied is the victor.

This war is not about subscription numbers, it's about profit.

7-23-2007 @ 10:48PM

Frank J. Weisz said...

Netflix is another classic business case of a market leader succumbing to the sin of pride and grossly under-estimating its competition. I remember when NFLX set the standard. Now, instead of being proactive and taking initiative, it's playing keep-up with BBI. The only Board members who've been buying the stock the last few years are outside Directors. Executive management has been doing plenty of pre-planned stock selling, but when was the last time Hastings, Kilgore or McCarthy actually bought any of their own stock?!?!?!