More Tailwinds for Netflix

Netflix NFLX shares got a boost Monday as Wall Street speculated that a key competitor is about to enact a price increase.

Thomas Weisel Partners analyst Gordon Hodges said in a research note that shares of the online DVD rental company could see upside if Blockbuster BBI is forced to raise the price on its DVD-by-mail service.

"We believe the competitive environment may improve faster than earlier expected as Blockbuster appears to be tinkering with pricing and already implementing price increases through a variety of offers," Hodges wrote. His firm makes a market in Netflix shares and has an investment banking relationship with the company.

Shares of Netflix were recently up 35 cents, or 3.2%, to $16.12. Hodges said the stock could rise to around $23 in the event of a price increase. Meanwhile, Blockbuster, the movie rental giant that was slow to enter the online-subscription game, was trading down 11 cents, or 1.2%, to $9.04.

Currently, Blockbuster's standard online service costs $14.99 a month. That's a 20% discount to Netflix's price of $17.99 a month. Furthermore, Blockbuster has launched an aggressive marketing campaign to lure customers. Despite all this, Netflix remains the market leader, and Pacific Growth Equities analyst Derek Brown estimated that it is adding new subscribers at about the same pace at its deep-pocketed rival.

Brown noted that Netflix added 789,000 subscribers in the fourth quarter of 2004 and the first quarter of 2005 combined. That performance surpasses its number of new subscribers added in all of 2003 and in any two consecutive quarters in the company's seven-year history. By comparison, Blockbuster claims it added 750,000 subscribers between mid-August and halfway through the first quarter. It plans to have amassed a cumulative total of 1 million subscribers by the end of this year, compared with Netflix's estimate of 4 million.