Price Cuts Bloody Netflix

Steve Swasey, a Netflix spokesman, declined to comment on the company's second-quarter performance. He said the price reductions on Sunday came after it successfully reduced prices on its less popular subscription offerings, such as its $4.99-a-month introductory price and its $13.99 unlimited rental offering with a maximum of two DVDs out at a time.

"We've been looking at price reductions for our most popular plans, and based on the success of previous price reductions, we decided now was the time," says Swasey.

He declined to comment on Blockbuster's pricing, but he pointed to Netflix's online viewing option for its members, which allows subscribers to access more than 2,000 movie titles on its Web site for instant viewing on their personal computers.

"We think that's a compelling value for consumers," Swasey says.

A Blockbuster representative couldn't be reached for comment on Netflix's move.

Analysts, on average, expect Netflix to report second-quarter earnings of 27 cents a share after the closing bell, according to Thomson First Call.

For its part, Blockbuster is expected to report a loss of 9 cents a share for the quarter on Thursday. Its shares recently were down 9 cents, or 2.1%, to $4.19.

Meanwhile, the prospect of lower prices on its most popular subscription offerings could mean lower profits for Netflix in future quarters if it's not able to cut its technology and marketing spending to offset the lost revenue.

"They can cut back spending to preserve profitability and hold on to subscribers, but that could start the company's death spiral in the long-term, because their technology is their competitive advantage," says Pachter. "It's going to be very difficult for these guys to draw the right balance between spending and pricing when they have an aggressive Blockbuster coming at them with its huge store base."