Blockbuster cuts into Netflix
Thursday, April 19, 2007 7:34 AM PDT
By Los Angeles Times
Printable version
E-mail this articleBlockbuster Inc. is finally getting some payback in its battle with Netflix Inc.
For years, the video-store giant has watched its market share eaten into by the online DVD renter. Wednesday, however, Netflix disappointed Wall Street with its quarterly earnings, saying Blockbuster's competition was slowing its growth.
Although Netflix's quarterly revenue rose 36 percent from a year earlier, to $305.3 million, the online pioneer saw its earnings -- $9.9 million, or 14 cents a share -- fall 2 cents below the consensus estimate among analysts. Netflix Chief Financial Officer Barry McCarthy described it as the most disappointing quarter since the Las Gatos, Calif.-based company went public in May 2002.
Founder Reed Hastings acknowledged that the battle over new subscribers had intensified, with some preferring the variety of options provided by Blockbuster, which supplements its retail network with an online business.
But Hastings said Blockbuster's approach was a money loser for the company that could not be sustained.
"Obviously, when you quite literally give away the store, you are going to see both share growth and market growth," he said on the earnings call Wednesday. "We are continuing to improve our service levels and reduce our costs."
Blockbuster, which has struggled for years to find its niche online, is finally seeing a turnaround in its business.
Both Netflix and Blockbuster offer online services at a monthly set rate. But late last year, Dallas-based Blockbuster began offering its online subscribers the option to return and check out DVDs in its stores at no additional cost.
Netflix has seen some subscribers flee as a result, because all its DVD deliveries are made through the mail -- a limitation that means subscribers have to wait at least two days before receiving a new movie.
"Customers are no dummies," MarketWatch analyst Herb Greenberg wrote on his blog. "They obviously like the combination and flexibility of mixing bricks-and-mortar with online."
But Youssef Squali, analyst with Jefferies & Company Inc., said Blockbuster eventually would need to raise its prices.
"We believe it's a question of when, not if, Blockbuster raises Total Access prices, as their current pricing is clearly not sustainable," Squali said in a report. "When they do, Netflix's growth should reaccelerate."
Netflix signed up 487,000 subscribers during the first quarter, a 30 percent drop from 687,000 new customers at the same time last year. Blockbuster isn't scheduled to release its first-quarter numbers until May 2, but its management previously predicted the company's online service would lure 800,000 more customers during the first three months of the year.
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