November 5, 2004 4:00 AM PST
DVD price wars: How low can they go?
The retail giant this week cut the price of its DVD Standard Plan by 7.5 percent, from $18.76 a month to $17.36. The reduction trumps recent price cuts from Netflix and Blockbuster, which now offer similar plans for $17.99 and $17.49, respectively.
The new Netflix price, which came about last month when the company slashed $4 off its flagship monthly plan, entitles subscribers to unlimited rentals, with three movies out at any time. The company had raised its prices to $21.99 just six months earlier and had counted on the extra revenue to help compensate for rising costs.
Plunging prices and new competition from Blockbuster and Wal-Mart are putting pressure on online movie rent-by-mail pioneer Netflix.
Unless significant cost savings can be found elsewhere in the business, Netflix could be dangerously close to losing money on many subscribers, but the company isn't standing still.
Netflix has acknowledged that the aggressive actions of its rivals this year took it by surprise. The next year, and perhaps longer, will be a "land grab" period in which profits will be hard to come by despite extraordinary growth, the company's executives said.
"We underestimated the likelihood and significance of competition, primarily from Blockbuster and Amazon," Netflix CEO Reed Hastings said Wednesday at a Morgan Stanley investor conference. "We came to the view that if (they) were going to enter, they would have done it in 2002, when the market was smaller, or in 2003."
The last several weeks saw a flurry of price cutting as Netflix jockeyed with Blockbuster and Wal-Mart for consumers' dollars, and as all three looked to the possible entry of Amazon.com into the DVD rent-by-mail business.
The price wars are helping fuel demand for what may be the lowest-tech high-tech business around. While Internet companies start to lay the groundwork for true video-on-demand service, the DVD-by-mail business has already gone a long way toward replacing the old video store rental business.
The result has been sudden and bitter competition in a market that Netflix, which now has more than 2.2 million subscribers, has had largely to itself for years.
A year ago, Wal-Mart was the first to enter the fray. The bellwether retailer followed its usual strategy of undercutting the market, offering a low-cost $15.54 plan limited to two DVDs at any one time, a middle $18.76 tier allowing three DVDs, and a top $21.99 tier offering four DVDs a month. (This week's price cuts affected only the middle tier.)
That wasn't enough to keep Netflix from raising its long-standing price from $19.99 a month to $21.99 a month last June. But Blockbuster's entry proved more serious. The company opened its online DVD movie rental service for $19.99 a month in
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