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UPDATE: Blockbuster Drops Online Subscription Price to $14.99

22 Dec, 2004 By: Holly J. Wagner

Blockbuster Video dropped another bomb in the online DVD rental price war today, dropping its three-out monthly subscription price to $14.99 a month plus tax for at least a year.

“We are lowering our subscription price to $14.99 a month. For those who subscribe now, this price is guaranteed through January 2006. Existing Blockbuster Online subscribers will enjoy the same guarantee,” said Shane Evangelist, Blockbuster SVP and GM of Blockbuster Online. “This is not a promotion. We want to make it clear to anyone who is now subscribing to an online service or considering such a service that Blockbuster is committed to being the high-quality, low-cost provider in the online rental space.”

The lower subscription price entitles subscribers to the same service Big Blue previously priced at $17.49 a month: unlimited rentals, three movies out at a time, and two free in-store movie or game rentals per month.

Even that price was a reduction offered in response to a Netflix price cut, from $21.99 to $17.99 per month, after Blockbuster Online launched and Amazon.com's rumored intent to enter the U.S. rental-by-mail surfaced. Wedbush Morgan Securities analyst Michael Pachter has estimated that a million Netflix customers may have defected from Blockbuster. Blockbuster executives say the online service is bringing lapsed customers back.

“To date, more than half of our online customers are new to Blockbuster or reactivated, meaning they have not shopped at our stores in the past six months,” Evangelist said.

Netflix did not immediately respond to requests for a comment.

At least one analyst suggested that Amazon is at least as much a target of the price cut as Netflix.

“It's a fairly complicated situation. Netflix has not responded, although I imagine they will match the price,” said analyst Dennis McAlpine of McAlpine & Associates. “One would expect that one reason for doing this is to scare Amazon out of the business, at least until they get enough subscribers, which might also scare them out of the business [for good]. You can scare Amazon and at the same time screw Netflix a little bit.”

Starting in mid-January, the service will have 23 distribution centers, more than double the service's distribution capacity when it launched in August 2004 and just short of Netflix's 29 distribution centers.

A new technology Blockbuster is implementing with the U.S. Postal Service should shorten its delivery cycles, a spokesperson said.

In the same announcement, Blockbuster touted an expanded title selection of 30,000 titles plus increased copy depth.

"We have the largest number of titles in our online rental library of anyone in the marketplace,” Evangelist said.

Still, Blockbuster and Netflix limit their online services to movie rentals.

“It must mean that we are reaching their members,” said John Fleming, CEO of fledgling competitor GameznFlix.com, which offers a three-out plan that includes movies and games for $17.25 per month. “We do not plan on changing our already low pricing at this time.”

McAlpine said he is studying the potential impact on revenue-sharing deals. It was not immediately clear if the pricing structure would violate revenue-sharing agreements.

“What does this mean to rev-share? I don't know that yet,” he said. “If it is the end of rev-share it could be a real mess.”

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