Blockbuster Bloodies Netflix

In Wall Street's DVD wars, the empire just struck back.

The rise of Netflix (NFLX Quote) and its innovative online DVD subscription service brought Blockbuster (BBI Quote), the empire of movie rentals, to its knees.

But at the end of last year, Blockbuster launched its Total Access plan, using its 8,000 stores along with an advertising blitz and an online subscription service of its own to steal back customers. The first quarter was a key test for Netflix to see if it could weather the empire's reprisal -- and it failed.

Shares of Netflix were down nearly 8% Wednesday after the company posted a doubling in first-quarter earnings but slashed outlook for 2007 revenue and subscribers.

"This is quite a change in outlook for them and quite a change in tone," says Chad Bartley, an analyst with Pacific Crest Securities who holds a neutral rating on Netflix shares. "We've been concerned about the competitive landscape for Netflix and its long-term prospects as movie-watching goes online. Today's results show there is also a nearer-term threat from Blockbuster."

Netflix reported net income of $9.9 million, or 14 cents a share, for its first quarter, up from the $4.4 million, or 7 cents a share, it recorded for the same quarter last year. Excluding one-time items, it reported earnings of 16 cents a share, matching analysts' mean estimate as reported by Thomson First Call.