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A Blockbuster Offensive

12 Jun, 2007 By: Erik Gruenwedel

Blockbuster Inc. June 12 upped the ante in its rental turf war with Netflix by implementing a series of strategic initiatives aimed at undermining the online movie rental pioneer.

The Dallas-based No. 1 movie rental service introduced Blockbuster By Mail, a mail-only plan with subscriptions starting as low as $4.99 per month for two rentals out at a time. The offer also includes a coupon for a free in-store movie or video game rental.

Blockbuster also cut $1 from its $17.99, three-out unlimited movie rental plan to Blockbuster By Mail customers.

All movies and games are ordered online and can be returned in-store similar to Blockbuster Total Access. Unlike Total Access, however, subscribers can only receive new titles from their rental queue by mail — not in-store.

Blockbuster is offering free trials of both Total Access and By Mail to first-time customers.

Netflix, which has offered a $4.99 monthly plan for some time, recently added three digital movie files from its PC-based streaming service for the so-called “5 for $5” rental plan.

Shane Evangelist, SVP and GM of Blockbuster Online, said the initiatives were aimed at capturing what he said would be a 43% surge in online movie rentals in 2007.

“We intend to capture our share of that growth [and] broaden our customer base,” said Evangelist.

Blockbuster has spent heavily (and lost money) while gaining market share, including 3 million subscribers, in the online space since launching Total Access six months ago.

Analyst Michael Pachter with Wedbush Morgan Securities in Los Angeles says the costs are worth it.

“It's a smart strategy,” said Pachter.

He said before the launch of Total Access, Blockbuster Online attracted 1.5 million subscribers in two years. Pachter said all new subscribers and upwards of two-thirds of the original online subscribers have migrated to Total Access.

That leaves about 1 million subscribers who Pachter says rent primarily online and not in-store. The $1 price reduction to its most popular online rental program will cost Blockbuster about $1 million per month — a loss Pachter says the company can easily make-up increasing Total Access monthly rates 50 cents.

“It only takes a couple hundred thousand new Total Access subs to offset the $12 million they are giving away on online only,” Pachter said.

Blockbuster's announcements sent shares of Netflix falling more than 7% in heavy mid-day trading. Several analysts reportedly described Blockbuster's moves as “negative for Netflix.”

A Netflix spokesperson was not immediately available for comment.

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