Blockbuster Cuts Deeper

Just when many of us thought Blockbuster (NYSE: BBI  ) probably couldn't afford to keep bleeding money for much longer, it treated us to a surprise. Much like the Black Knight in the infamous scene in Monty Python and the Holy Grail, Blockbuster seems to be insisting, "It's just a flesh wound!" despite gushing evidence to the contrary last quarter.

Blockbuster's latest competitive jab at Netflix (Nasdaq: NFLX  ) is undercutting its three-DVDs-out-at-a-time, unlimited plan to $16.99 (versus Netflix's $17.99) with its Blockbuster By Mail option. Its cheapest Blockbuster By Mail option, at $4.99, not only matches Netflix's cheapest service package, but its subscribers can skip mailing the DVDs back and take them straight to the stores. Although they can't pick up a new movie with that plan, it means customers will get a new movie a day earlier (although as a Netflix subscriber myself, I've never felt all that bent out of shape to give my movies an extra day to come since they come so darn fast to begin with).

An analyst upgraded Blockbuster today, which seems to explain the stock's sizable jump. I personally think investors who are buying into this are ... well ... short-term thinkers at best, and at worst ... well, lemmings careening off a cliff comes to mind. Blockbuster continues to mock the idea of profitable strategies as it engages in a no-holds-barred arms race. This is a debt-laden company that is choosing - no, insisting -- on further money loss. Are memories so short that some investors have forgotten last quarter, which made it obvious that Total Access' excesses are a money-losing proposition for Blockbuster?

I dug around Blockbuster's site, and it reminded me why Netflix did well to begin with -- Netflix formed an innovative, customer-centric strategy, while Blockbuster was resting on its laurels (and yesterday's model). As far as I could tell, Blockbuster has now shamelessly copied its most formidable rival with the look and feel of its online rental site, which doesn't exactly give it any points for ingenuity. (Interesting, too, are a few facts that Netflix notes on its site: More than 90% of Netflix subscribers describe themselves as so satisfied they recommend the service to others; every three months, Netflix subscribers rent more than 95% of Netflix's 80,000 titles; and a timely reminder I've long suspected, Netflix is actually an environmentally friendly option, given the fact that it doesn't involve extra car trips to stores.)

Regardless of how the short term might sound precarious for Netflix -- more shudders emanated from renewed rumors Apple (Nasdaq: AAPL  ) might try its hand at video rentals -- I'm far from convinced that Blockbuster has much clue of how to innovate or create particularly loyal customers, despite its drop-dead pricing and copycat online/offline hybrid. No, Blockbuster can't offer these prices forever. When Blockbuster is forced to push for profit again, I wouldn't be surprised if history repeats itself as a whole new group of disillusioned Blockbuster customers emerges, and I'll bet Netflix will have the welcome mat at the ready.

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Alyce Lomax does not own shares of any of the companies mentioned.


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