Free DVDs for Everybody!

If that headline's an exaggeration today, judging by the way things are going, it may not be for long. In the third salvo in what is shaping up to be a grand digital pricing contest (I'd call it something less printable, but this is a family publication), movie-hawker Blockbuster (NYSE: BBI  ) took less than 24 hours to undercut DVD-by-mail first-mover Netflix's (Nasdaq: NFLX  ) price cut.

On Thursday, Netflix announced that it would drop its $21.99 basic subscription rate to $17.99 in an effort to stave off inroads into its market share by competitors Blockbuster and Wal-Mart (NYSE: WMT  ) and to scare off expected competitor (Nasdaq: AMZN  ) .

Friday, Blockbuster responded in kind, announcing it would drop its own price to $17.49. Not exactly an original idea, but touche anyway. I want to hand it to Fool board member "Newsman," who immediately observed with a wink that Wal-Mart, with its $18.76 plan, "is now the premium-priced option."

This illustrates perfectly the absurdity of the situation. Within a span of 48 hours, during which time Netflix announced record profits in large part because of its ability to implement and retain customers with a $21.99 plan, the cost of renting an endless supply of movies has dropped 20%. And why? Because two out of four actual or potential big players are fighting for market share in a market that has achieved about 3% total penetration.

Look at it another way. Last week, I took General Motors (NYSE: GM  ) to task for its patently silly marketing ploy of offering $6,000 cash rebates to buyers of its SUVs (read all about it here). In many cases, that amounts to 20% of the cost of a new GM vehicle and effectively eliminates the possibility that GM will make any profits -- no matter how many cars it sells. In fact, just a few days later, fellow Fool Alyce Lomax confirmed as much when describing GM's huge earnings miss (click here to read all about it).

But that's in a market with essentially 100% penetration. Everybody who wants a car in America already has one, and to sell more, GM feels it needs to throw buyers a bone. In marked contrast, only about one person out of every 30 has a subscription to a DVD-by-mail service. Yet these movie mogul morons are running around like proverbial headless chickens, cutting their prices right and left fighting over that "one person" -- when there are 29 other people out there whom they could just as easily, and more profitably, be turning into paying customers.

Let me not put too fine a point on this: Netflix and Blockbuster are both morons for engaging in this price-cutting suicide pact. They should both cease and desist right now and get back to making their shareholders some money.

Fool contributorRich Smith owns shares of Netflix, but today he isn't particularly happy about that.

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