Netflix Takes Another Blockbuster Bruising

In the brawl between Blockbuster (BBI) and Netflix (NFLX) over online DVD rentals, the gloves are coming off.

With its losses mounting, Blockbuster surprised Wall Street Tuesday by offering lower subscription prices on its online rental service, signaling that it's willing to endure more financial pain in return for stealing subscribers away from its rival.

Netflix has maintained that Blockbuster's pricing is unsustainable, and Wall Street was just beginning to embrace the idea that Blockbuster might not be forced to raise prices soon. News of even lower prices sent shares of both companies sliding.

Shares of Netflix were recently down $1.62, or 7.4%, to $20.31. Blockbuster was off 6 cents, or 1.5%, to $4.01.

"Blockbuster is like a caged animal right now, so it's not financially rational," says Piper Jaffray analyst Michael Olson. "Their in-store rental business is in decline, so their only option is to build out its online rental service, and they're willing to take this price war as far as they can."

Blockbuster announced the launch of its Blockbuster By Mail program, an unlimited three-DVDs-out-at-a-time plan for $16.99 a month, undercutting a competing offering from Netflix that is priced at $17.99.

Both plans allow customers to rent three DVDs at a time through a mail-order, online subscription model that was pioneered by Netflix, but Blockbuster allows customers to return DVDs at its chain of 8,000 stores instead of using the mail, which means they receive their next DVD in the mail a day earlier. That allows customers to rent more movies every month.