Price Cuts Bloody Netflix

Updated from 11:48 a.m. EDT

Shares of Netflix (NFLX Quote) plunged Monday after the online DVD-rental service cut its prices -- a move that signals that rival Blockbuster (BBI Quote) may be winning a price war and luring away customers.

Netflix lowered the monthly subscriptions rates for two of its most popular plans by $1 on Sunday. The company's shares recently were trading down 11% to $17.45, after earlier hitting a 52-week low of $17.17.

Wedbush Morgan Securities analyst Michael Pachter says the price cut is a sign that Netflix is bleeding subscribers.

"The Netflix story is all about subscriber growth," says Pachter. "The wording of this, the timing and the actual act of cutting price suggests they lost subs in the second quarter, which means people are going to realize that they aren't going to grow anymore."

Netflix had 6.8 million subscribers as of the end of March, and it said in its news release on Sunday that its new pricing will benefit its "more than six million members." Pachter says that language suggests the company hasn't gotten any closer to 7 million subscribers, and it may be losing ground -- a prospect that would disappoint Wall Street.

The release came out just before Netflix's report of its second-quarter results after Monday's closing bell.

In the first quarter, Blockbuster added 800,000 net new subscribers to its online subscription service, which launched in 2004, bringing its total to over 3 million subscribers. In late 2006, it had only 1.5 million subscribers.