How Low Can You Go?

Limbo is a game for the agile. However, if you ask a company like Dell (Nasdaq: DELL  ) , it will tell you that just because you're agile and can bend lower than those around you, that doesn't mean you want to challenge them to a game of limbo.

Netflix (Nasdaq: NFLX  ) cranked up the Belafonte and lowered the stick last night when it announced that it would be lowering its subscription rates next month. Investors responded with a limbo of their own today, sending shares down 40% to $10 and change, marking a new 52-week low for the company.

The news comes as a shock for two reasons. The first is that over the summer it had bumped up the rate on its basic plan, which allows for three DVD rentals out at any given time, from $19.99 to $21.99. Dropping it down to $17.99 a few months later doesn't give an investor a whole lot of confidence that the company is thinking its pricing strategies through.

The second reason why the news is alarming is that Netflix seemed to be doing just fine with the higher membership plans. Last week it announced that it wrapped up September with 2.2 million subscribers, a 73% improvement over last year's tally. That upbeat spurt was acknowledged last night when the company reported quarterly earnings of $0.29 a share as revenue nearly doubled to $141.6 million.

However, all that growth is out the window as the company says it will likely only break even next year due to its cutthroat pricing strategy. Before you wonder why Netflix would do such a thing, it's worth mentioning that during its conference call, the company said that several sources indicated that Amazon (Nasdaq: AMZN  ) was readying a similar service.

So this scorched-earth retreat isn't entirely baseless. The competition was already starting to drool when Netflix hiked its monthly rates back in June. Wal-Mart (NYSE: WMT  ) had been at $18.76 for some time, but Blockbuster (NYSE: BBI  ) showed a rare case of perfect timing by rolling out a decent Netflix clone at the old Netflix price of $19.99. Netflix seemed to take this all in stride, yet it seems as if Amazonian whispers caused it to flinch.

The stock is naturally taking a beating this morning on the news. While the company was teasing the market last week with higher earnings projections and visions of gross profit margins topping the 50% mark, it was all rescinded awfully quickly.

The end result is that Netflix will keep its pie. It has the 2.2 million subscribers. It has the lean overhead and an efficient and established network of distribution centers. Wal-Mart, a fiscally sensible company, will take a look at its hand and probably fold if a much larger player is willing to play a break-even game. Blockbuster will stick around because it has more at stake. It also has its free in-store rentals to give its mail-order DVD rental service something distinctive.

And what about Amazon? As powerful and knowledgeable as it may be when it comes to e-commerce, if it did have a new service in the works, it doesn't stand a chance unless it prices its offering below Netflix's reduced price. This might be the move that keeps the monster under the bed in the near term.

So, sure, Netflix can get back to its pie. It's definitely a growing one. But shareholders will be quick to notice that the pie is missing something in terms of taste. Limbo is for losers.

With lower subscription plans likely to sway even more members, have you rented any incredible DVDs lately? How big is your Netflix queue these days? What is the greatest film of all time? All this and more in the Great Movies discussion board. Only on Fool.com.

Longtime Fool contributor Rick Munarriz has been a Netflix subscriber -- and investor -- since 2002. He is part of theRule Breakersanalytical team that will be looking to unearth the next Netflix -- while it's still in Pampers instead of Depends.


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