We're now just hours away from getting Netflix's
The 3-out unlimited plan -- the one that most Netflix subscribers belong to, which allows members to go through as many DVD rentals as they want with no more than three out at any time -- is seeing its price dropped by a buck to $16.99 a month.
The company's press release waxes on the patron-friendly obvious. "Netflix Members to Benefit From New Low Prices" reads yesterday's headline.
I guess one could also rewrite that as "Netflix Shareholders to Suffer From New Low Stock Prices."
See, the market doesn't like price wars. A buck may not seem like much, but that's pure profit being scraped away. Netflix has now cut prices on its four most attractively-priced plans this year, in theory trimming away roughly $70 million a year in pre-tax profits. That's a large sum for a company that has never produced that much in operating income in any year.
It's different this time, really
Bulls can argue that the last Netflix price war didn't turn out so badly. When it cut prices by $4 a few years ago, that was enough to keep Amazon.com
The market didn't like it, but it soon saw a kinder competitive landscape, with Netflix returning to profitability sooner than expected.
It's a bit trickier this time around. Digital delivery is slowly poking holes into the mail-delivered model. Blockbuster's
Wasn't Blockbuster losing so much money with Total Access that it was just a matter of time before it inched prices higher or gagged on its debt-saddled balance sheet in bankruptcy court?
It's a different poker game this time around. Three years ago, Netflix successfully called Amazon's bluff. It's pointless now. Blockbuster is all in. It has thrown all its chips on the mail-delivered wager. It established the regional distribution centers to equal the Netflix turnaround. Its physical stores have been remodeled to encourage online memberships.
In some ways, Blockbuster's product is actually superior to the Netflix experience. That may have sounded like heresy a couple of years ago, but here are some of the Total Access advantages:
- Blockbuster's plan allows for as many as six movies out at the same time (three by mail, three in-store through the free in-store exchanges).
- Blockbuster ships out rentals six days a week. Netflix runs its distribution centers only on weekdays.
- Video game buffs can get a free in-store video game rental every month through Blockbuster. Netflix just doesn't offer games.
Yes, Netflix still has a few major advantages. The selection and title availability -- in my experience -- are better with Netflix. The user interface at Netflix is slightly more intuitive. Netflix also has a deeper pool of viewer movie ratings, making its recommendations that much stronger. Oh, and Netflix also has the Instant Watching feature, allowing subscribers to stream a set amount of titles online in any given month.
But if Netflix, with all of its advantages, still feels that is has to be the low price leader, what does this say about the company's competitive positioning? Investors want companies with pricing power.
As the hours drag
So why did Netflix make this move on the eve of its quarterly report? Couldn't it have just lumped it onto this afternoon's update? If the second-quarter earnings are good, Netflix could always argue that it knows what it is doing in this difficult climate. If the numbers are bad, Netflix could just couple the announcement with a warning that margins will be tested as a result of the buck back mountain.
Showering shareholders with two consecutive days of bad news -- or hitting them with an upper the day after a downer -- makes about as much sense as moving The Adventures of Pluto Nash or Ishtar to the top of your Netflix queue.
I keep trying to tell myself that Netflix CEO Reed Hastings knows exactly what he is doing. Maybe he knows that Blockbuster is too fat to go too much lower in this limbo stick dance before it breaks its back -- and backers.
Like I was telling our own Mac Greer last week, digital delivery is going to be a real challenge for Netflix sooner than most of us realize, but today's emphasis needs to be on Blockbuster. This is the time to build up the widest audience possible, if only to have them in place when it comes time to market the next-gen platform that will replace the DVD as the way that we consume movies.
I'm just not so sure that a price war will have the desired result. I don't think that you will ever hear someone say, "I was going to leave Netflix at $17.99, but it's just too good a deal at $16.99." A buck isn't a deal-breaker to the consumer, yet it may be enough to turn this year's Wall Street profit projections into a small loss.
It's a cry for help, really. It's the rattling of the dinner bell for Amazon (if the buyout chatter that has been going around for years is true). And it's blood in the water for Blockbuster, which has been circling with teeth bared for some time.
It's hard to believe in Netflix when things like this happen. I'm dreading logging in to my Netflix account, only to realize that my greatest fears are confirmed: the company is fresh out of Raging Bull.
The saga, in a nutshell:
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Longtime Fool contributor Rick Munarriz has been a Netflix subscriber -- and shareholder -- 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.
