It's a classic case of misdirection. Ever since Netflix (Nasdaq: NFLX ) lowered its monthly price to $17.99 to spook Amazon.com (Nasdaq: AMZN ) out of entering the domestic DVD rental market, everyone has been watching for the first sign of Amazon landing on Netflix turf. That seems like a far-fetched fear. Anyone who has seen Amazon's sky-high pricing strategy in the United Kingdom knows that it doesn't stand much of a chance without a more aggressive pricing policy if and when it does decide to launch the service stateside.
Amazon can't afford to be more expensive than Netflix. It also can't afford to enter the market without dozens of localized distribution centers that assure fast delivery to most of the country's population. That's why Amazon doesn't worry me despite its sterling online reputation. The real competition is already stomping around, as Blockbuster (NYSE: BBI ) has already undercut Netflix on price while building out the necessary DVD distribution network.
But this is when things get interesting. Driving past a Blockbuster store with a huge $9.99 all-you-can-eat banner, I was fearing yet another shot in the price war. When I saw Blockbuster's new televised spot pitching $14.99 monthly subscriptions, online or offline, I figured that Blockbuster had finally integrated its online accounts to allow for some store-based swapping.
Now that made me nervous as a Netflix investor. But -- surprise -- like so many of Blockbuster's ad campaigns lately, there is more to the marketing message than meets the eye. For starters, the $9.99 plan is just for the first month. The automatic billing at $14.99 kicks in after that. Why Blockbuster would try its hand at fine-print introductory-rate advertising with the New Jersey attorney general hounding it for its deceptive "no more late fees" campaign is beyond me. And what's worse is that $14.99 will be good for only one movie at a time. Blockbuster's online plan allows for three DVDs out at any given time for the same price and includes two free in-store rentals every month. I can't imagine anyone with Internet access favoring the store plan, and I can't imagine anyone without Internet access not feeling cheated by the disparity.
And, no, the services are still not integrated. Blockbuster will be a force when that happens. When customers can exchange a mailed disc for a new rental at the store, in a program where the limits are equal online and offline, Blockbuster will give Netflix something to worry about. For now, each and every move that Blockbuster makes these days is wreaking havoc for those at the store level. Stop by your local store and ask the manager whether inventory control and "guaranteed in-stock" new releases have been the same this year since "no more late fees" was launched. And also find out how many irate customers the store has had to pacify because they didn't understand the new return policy.
Yet it's these odd equations (I mean, come on now, one store flick does not equal the value proposition of three DVDs delivered to your home) that still have me worried about Blockbuster as it pertains to making life difficult for Netflix. Amazon and Wal-Mart (NYSE: WMT ) have no reason to play desperate games with their online rental business. Yet Blockbuster is as desperate as Netflix because this is it. This is for all the marbles right here. If Blockbuster loses the growing online market, its offline market won't matter much longer, and the online market is all Netflix has to live for, corporately speaking.
That's why it's do-or-die time for Netflix -- and Blockbuster.
Some recent stories worth viewing:
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.