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Dueling Online Ads

6 May, 2006 By: Holly J. Wagner

Unlimited DVDs, delivered to your door. No late fees. No due dates. It's a familiar refrain in the industry, now trumpeted from banners on free e-mail Web sites, news sites and movie fan sites.

“Can your mailbox handle it?” beckons one Blockbuster banner. “Two weeks free rentals.”

“Netflix Delivers DVD Rentals,” teases the Netflix banner. “Free Trial.”

It's a head-to-head battle for subscribers in which banners on some sites often roll from one company to the other, offering essentially the same proposition. Different plans show up on different sites, targeting likely income or behavior brackets.

Both companies use text ads on search engines for marketing, but display advertising ranges. Ads on movie fan sites, news sites like CNN.com and youth-oriented sites like MySpace.com are de riguer.

Netflix pop-ups spring from Netscape's home page, sometimes hovering above Blockbuster Online banners. Banners for Netflix and Blockbuster Online rotate on Yahoo and Hotmail's e-mail pages. Sometimes they offer the same plan, sometimes different ones.

“The mail is more generic; you are not limited to keyword buying and subject to costs going up based on the term entered,” said analyst Tom Adams of Adams Media Research.

Mail services also typically require at least minimal registration information, generally including ZIP codes. That information could allow the services to target markets where there are only one or two video stores, which can make the selection of an online service appealing, Adams said.

Sometimes the same sites offer different plans in ways that seem counterintuitive. In the space of five minutes, while e-mailing on either MSN's Hotmail site or Yahoo's free e-mail site, the price of Netflix's offer can change three times: Banners roll over seemingly randomly among $5.99-, $7.99- and $9.99-a-month prices, all promising a two-week free trial and sending viewers to the Netflix site for complete details.

“We're price-testing,” a Netflix spokesperson said. “We have been for several months. We've got a number of different price point tests going on at any one time to test the elasticity. To give any more detail about the price-testing could bias the test.”

“They put out 10 million impressions at $9.99, and see how many churn out,” Adams said. “Then compare that to $7.99. A year from now, they can decide maybe it's not worth it to get customers at $5.99 because they churn too fast.”

Blockbuster CEO John Antioco has acknowledged that Blockbuster Online has not grown as fast as originally projected. Analysts have long said the addressable market for online rentals is a fraction of the overall rental market, and that market share will come from luring existing subscribers from competing services.

Some Blockbuster banner ads even sport a Netflix-red background, a departure from Blockbuster's signature blue-and-yellow color scheme that remains only in the logo floating precariously on the red field.

Blockbuster declined to comment.

Just how much each company is spending on online ads is difficult to pin down. Both companies report advertising spending — $208 million in the United States last year for Blockbuster and $135.9 million for Netflix — as a single figure encompassing all advertising channels. Converting in-store customers to online customers is still the least expensive and most profitable way to gain online subscribers, Blockbuster CFO Larry Zine told analysts on the company's first-quarter financial call, but the company will continue advertising to build the online service. Online ad spend in the first quarter of this year was about half what it was in the first quarter of last year, Zine said, but executives did not break out the number for the quarters. The Web assault won't abate any time soon. Executives for both companies have said that if anything, they will increase online advertising this year.

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