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Blockbuster Losing Customers at ‘Unprecedented’ Rate, Analyst Says

19 Apr, 2010 By: Erik Gruenwedel

With Netflix expected to report stellar fiscal results this week, Michael Pachter, analyst with Wedbush Morgan Securities in Los Angeles, April 19 said he projects the Los Gatos, Calif.-based online DVD rental pioneer to add up to 1.6 million new subscribers during the first quarter -- largely at the expense of Blockbuster and other traditional video stores.

Pachter said Netflix would end the quarter with 13.5 million to 13.8 million total subscribers due to escalating closures of brick-and-mortar video stores including Hollywood Video and Movie Gallery, in addition to about 200,000 incremental subscribers acquired from its Sony PlayStation 3 alliance.

“Blockbuster is losing customers to Netflix and Redbox at an unprecedented rate, driving continued upside to Netflix’s financial performance,” the analyst wrote in a note to clients.

Pachter, who also covers Blockbuster and Redbox, said Netflix would end this year with about 15.5 million to 16.3 million total subscribers – up more than 4 million subs since the beginning of the year.

He said Blockbuster’s recently revised day-and-date rental agreements with select studios would not significantly impact Netflix’s forward growth.

“It had similar arrangements in place throughout its decline,” Pachter wrote.

That said, the analyst maintained his “Underperform” status for Netflix shares, citing the stock’s recent record rise due primarily to hyped expectations following the launch of the Apple iPad tablet computer and the availability of a Netflix streaming app.

He disagreed with industry scuttlebutt that Netflix’s inclusion of an app in the Apple universe signified the computer maker conceding the streaming market.

“Mac owners have been able to stream movies for years,” Pachter wrote.

He added that Netflix would be challenged to maintain its torrid growth and stock valuation as Redbox (and Blockbuster) rolls out additional rental kiosks and implements its own streaming initiative.

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