Did Netflix and Coinstar See This Coming?

If there's anything that Netflix (Nasdaq: NFLX  ) and Redbox parent Coinstar (Nasdaq: CSTR  ) should know, it's that you can't assume that you've vanquished the enemy.

Surely they've seen how many of their horror movies end.

Friday the 13th's Jason Voorhees leaps out of the lake to tip the canoe over. Halloween's Michael Myers walks away after being riddled by bullets and a nasty fall. Carrie's Carrie White lifts her hand through her grave.

Now it seems as if Blockbuster isn't exactly dead either. Dish Network's (Nasdaq: DISH  ) freshly acquired chain is tweaking its pricing, according to this Los Angeles Times article. Moving toward a Redbox-esque model, Blockbuster will now be charging $2.99 for an overnight rental of its newest releases. Older titles will set a renter back $1.99 or less. Additional nights will run $0.99 for any rental. Blockbuster's previous rate has been a flat $4.99 for three days.

Redbox and NCR's (NYSE: NCR  ) Blockbuster Express are still cheaper than the new Blockbuster pricing. Redbox's booming popularity indicates that folks aren't exactly wild about standing in even the thinning checkout lines at the local Blockbuster.

However, it seems as if Blockbuster wants to go out in a blaze of gunfire.

Cue up Scarface.

Say "Hello" to my little friend
No one really knows how Blockbuster's tenure under Dish will play out -- and that includes Dish itself.

It didn't pay a lot more than what liquidators were willing to bid on a chain earmarked to be gutted, but the clock is ticking on an aging inventory of fading optical discs.

Whether Dish wants to use the remaining Blockbuster stores as a vehicle to push its satellite television service or build on its Netflix-esque service of mailed discs and streamed flicks, time isn't on Blockbuster's side. Bankruptcy afforded Blockbuster the opportunity to wiggle its way out of unattractive leases on profitless stores, but Dish can't afford to throw good money after bad. It needs to save its money to pay off TiVo (Nasdaq: TIVO  ) and ramp up its marketing budget to keep up with niche leader DIRECTV (NYSE: DTV  ) .

The aggressive pricing is more of a Hail Mary lob than a pricing war salvo. In other words, this is a last-minute desperation play. It's a going-out-of-business sale masquerading as bravado.

Blockbuster's only hope
It will be interesting to see how studios play this one out, because it will make all the difference between Blockbuster dying a quick death or possibly even thriving.

Tinseltown has brokered deals with Netflix and Redbox to hold back on new releases for the first four weeks. The availability of fresh flicks through Netflix's DVD buffet or Redbox's buck rentals were eating into sales. Time Warner (NYSE: TWX  ) -- the studio that kicked off these new release windows early last year -- claimed that 75% of its DVD and Blu-ray sales take place during the first 28 days of a new release. Cutting a deal to give Netflix and Redbox dirt-cheap discs if they agreed to hold off on offering a film when the public actually wanted it and a studio is actively promoting it was seen as a win-win deal.

How does Blockbuster's new pricing fit in all of this? Is $2.99 too cheap? At $4.99 for three days, Blockbuster's value proposition was similar to what video on demand and premium streaming services were charging. If Blockbuster succeeds at $2.99 it may devalue the value proposition of retail releases.

In other words, what many may interpret as an attack on Netflix and Redbox is really a shot at cable providers and the leading digital media giants. A round-trip to the corner Blockbuster -- if it's even still there -- may be a hassle. However, saving a couple of bucks over video on demand for the DVD with all of the special features is tempting. If we're talking about heavily marketed releases that won't be available for weeks through Netflix or Redbox, Blockbuster finally snags the differentiator advantage that it has lacked since the days of Wayne Huizenga.

Blockbuster's last shot to matter is desperate, but it's also pretty smart.

Is a cheaper Blockbuster a legitimate threat, or will the chain be dead in a year or two? Share your thoughts in the comment box below.

Motley Fool newsletter services have recommended buying shares of and buying puts in Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Longtime Fool contributor Rick Munarriz has been a subscriber and shareholder in Netflix since 2002.  Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.


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  • Report this Comment On June 01, 2011, at 3:15 PM, Fingerlakes wrote:

    >> standing in even the thinning checkout lines at the local Blockbuster.

    The Blockbuster local to me (maybe a mile) closed a couple of months ago. A % or nothing is nothing.

    The last time I was in that store has to somewhere over 10 years ago. For me it's always been Netflix.

    As for the MPAA claims that 28 days makes a difference: old media/ old guard trying to keep control in the new world.

    As for physical media going away any time soon: I doubt it. The picture isn't clear enough, nor problem free. DVDs still outsell blu-ray (imagine!) with the price differential. Yet I would take a blu-ray, or a physical disk over streaming any day.

  • Report this Comment On June 01, 2011, at 4:10 PM, ecajoe wrote:

    If there was still a network of stores this approach would be golden. The problem is with the remaining locations so far apart the two way drive to get a movie back to actually save money is not practical for many customers. l am sure DISH will do its best to make this new pricing work and attempt to bring customers back to the stores but the damage has already been done. l don't think people will change their habits that have already been broken. With Blockbuster the last stand for bricks and mortar l fear time is not on its side.

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