Not Another Price War

For once, pitching lower subscription prices shouldn't leave Netflix (Nasdaq: NFLX  ) investors holding the bag. I'm sure that some investors probably got nervous when colorful banner ads promoting $11.99 Netflix monthly plans started making the rounds a few days ago. After watching the DVD rental industry fall out of favor in recent months as Netflix and rival Blockbuster (NYSE: BBI  ) waged a margin-crunching price war, it would have been alarming for the market leader to go from $21.99 to $17.99 to $11.99 on its DVD rental service.

As it turns out, Netflix's most popular plan, which allows for unlimited monthly rentals with no more than three discs out at any given time, is tucked in firmly at the $17.99 mark. The company's new marketing efforts are aimed at its more obscure plan, which allows subscribers to rent as many as four discs during any given month, with no more than two out at any time, for $11.99.

Over the weekend I saw the new ads on Yahoo! (Nasdaq: YHOO  ) as well as on Time Warner's (NYSE: TWX  ) America Online welcome screen, so it's safe to say that the company is campaigning aggressively.

This move, in so many ways, is just brilliant.

For starters, because there is no limit on rentals with the company's pricier plan, an active user who begins to bleed into the double digits in monthly movie rentals will cost Netflix money because Netflix not only subsidizes the shipping costs both ways, but is also hit for revenue-sharing fees whenever a new release is mailed out. The $11.99 plan, capped at four flicks a month, assures that the account will likely be profitable.

Promoting a capped plan at a low price point also sends a message to Amazon (Nasdaq: AMZN  ) . While Amazon has only entered the United Kingdom market so far, it did so with a more expensive program that also caps the number of monthly rentals. If Amazon does enter the stateside market, and it probably will at some point, it will be hard-pressed to find a good groove unless it bites the bullet and undercuts Netflix's pricing.

Then you have Blockbuster, which doesn't have a capped plan. While Blockbuster is actively promoting its attractively priced $14.99 plan, if it were to roll out a two-out/four-max plan for $10, it would make its franchisees furious. They already have their hands full defending the "No More Late Fees" debacle, so how would they feel if Blockbuster started trying to move their customers online for what amounts to just two rentals in the bricks-and-mortar world?

So in one banner-ad salvo, Netflix is slapping down its two most-feared foes. I'm sure there are ways it could have sucker-punched Wal-Mart (NYSE: WMT  ) as well, but it's hardly worth the effort -- a recent Business 2.0 article placed Wal-Mart's DVD rental subscriber count at a pathetic 50,000, less than 2% of Netflix's existing membership base.

While I think that most new customers seduced by the $11.99 ad will ultimately upgrade to the more common three-out plan -- and that may lead them to kick Blockbuster's lower-priced tires in the process -- it's just what Netflix needs right now.

More feature presentations to mull over after you get back from the lobby:

Longtime Fool contributor Rick Munarriz has been a Netflix subscriber -- and investor -- since 2002.The Fool has a disclosure policy. He is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.


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