Pricing wars and home-delivered DVD rentals go together about as well as a balloon animal and a cactus farm. Blockbuster (NYSE:BBI) and Netflix (NASDAQ:NFLX) know the prickly sensation all too well. They took shareholders for a tumble two years ago when they slashed prices for their all-you-can-eat plans. They're at it again.
The monkey on their backs the first time was a Bezos baboon. Netflix felt that Amazon.com (NASDAQ:AMZN) was readying an entry into the market. It responded by slashing $4 from the price of a monthly subscription to its most popular plan -- the one that allows movie buffs to rent as many discs as they want, having no more than three out at a time.
Despite the market beating, it worked. Amazon never entered the market. Wal-Mart (NYSE:WMT) bowed out. Netflix also returned to profitability a lot sooner than many had expected.
Everything was good in Netflix's world, save for the growing fears of digital delivery and video on demand. That is, of course, until both companies opened fire again.
The price war so nice, they had to fight it twice
Netflix is now lowering the price of its two-out plan. The $14.99 plan, which allows for unlimited rentals with no more than two discs out at a time, will now be priced at $13.99 a month.
The buck slashing isn't an original move. Blockbuster introduced a new pricing tier this month that is a dollar cheaper than its $17.99 Total Access plan. The only difference in the three-out unlimited plan is that $16.99 customers can't exchange discs in-store for free rentals.
Sure, Total Access is too good to be true. As long as you don't mind the round-trips to the store, you can juggle as many as six movies at the same time. Given the choice, I think most will stick with the $17.99 plan, which is sadly bleeding Blockbuster dry.
However, just the notion that Blockbuster has a $16.99 plan that is nearly identical to the $17.99 Netflix plan does two things. One, it makes Netflix more expensive. Two, it helps point out the enhanced value of the Total Access plan.
In light of the new $16.99 offer at Blockbuster, Netflix moving down to $13.99 makes sense. Without the reduction, consumers would see Blockbuster's $16.99 three-out plan next to the $14.99 two-out plan at Netflix and be left scratching their heads. Paying 13% more for 50% more movies would appear to make Blockbuster the better value.
But what if two companies threw a pricing war and nobody came?
The vast majority of Netflix subscribers are enrolled in the three-out plan. However, the price cutting could entice a casual movie-watcher -- one who only goes through four to six movies a month through Netflix -- to downgrade to the two-out offer.
Over at Blockbuster, I can't see too many consumers spoiled by Total Access going for its watered down version. But while the new $16.99 Blockbuster plan may not appeal to existing Total Access members, it will serve it well in stealing new customers away from Netflix.
The irony within the violence
The amazing backstory behind this month's markdowns is that Blockbuster and Netflix actually settled a patent infringement lawsuit on Monday. In announcing the legal truce, Blockbuster indicated that it would be making its Total Access plan a more feasible business model.
"Blockbuster intends to continue to focus on subscriber growth but before year end plans to make modifications to the offering that it believes will strike the appropriate balance between continued subscriber growth and enhanced profitability," read its SEC filing on Wednesday.
Whether it means that Total Access will be rising or that its benefits will be stripped, it's definitely surprising to see the two companies hacking away at their rate cards. Yes, these are insignificant plans being discounted, for now, but it sets the pricing war precedent.
Subscribers, and unfortunately shareholders, now expect lower prices. Man, it was so easy to be a fan of Netflix back in 2002 when it was just one company against the world.
Check out this three-out plan. Three more related stories, all free (of course):
Netflix and Amazon.com are Stock Advisor recommendations. Find out why with a free 30-day trial subscription. Wal-Mart is an Inside Value pick.
Longtime Fool contributor Rick Munarriz has been a Netflix shareholder -- and subscriber -- since 2002. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.
