Movie rental chain Blockbuster (NYSE:BBI) has admitted what Fools have been saying all along: Its attempt to undercut archrival Netflix (NASDAQ:NFLX) on price was doomed to failure. The chain announced that it is raising prices and "testing" a $17.99 fee for unlimited rentals -- the same rate Netflix charges.
If you want to examine a pricing structure as complicated a Byzantine labyrinth, check out fellow Fool Marko Djuranovic's in-depth analysis of the mind-numbing fee schedules the two rental companies charge. He dissects the amazing range of possibilities available -- each with its own price point -- from bare-bones single movie plans to two-, three-, and four-movies-at-once plans. Or you can go all out with unlimited rentals.
Apparently Blockbuster realized that its $14.99 unlimited rental plan was eating into profit margins a bit too much. Netflix refused to follow Blockbuster's lead and maintained its price, which when you consider the cost of a movie ticket, really is fair. Sure Blockbuster's lower price was even more fair -- just not to shareholders. The company, you see, has been distracted of late.
Pricing war aside, the company announced a "no late fees" promotion that backfired and had the New Jersey State Attorney General breathing down its neck. Then it bid on competitor Hollywood Entertainment, only to lose to smaller rival Movie Gallery (NASDAQ:MOVI). It only just survived a bitter proxy fight by billionaire investor Carl Icahn for control of the company, which resulted in Icahn and two dissident directors being named to the board. And Moody's cut its sizeable long-term debt rating, citing lower than expected free cash flow, which sunk to a negative $148 million for the quarter.
Earlier this month, Blockbuster reported that first-quarter rental revenues fell 4% to $1.1 billion, as it missed out on some $145 million in late-fee revenues that it had enjoyed last year. At stores open at least a year, revenues fell 5.5% worldwide. Overall, the company lost more than $57 million, or $0.31 a share, compared to the profit of $114 million, or $0.63 a share, that it earned last year. The failed bid for Hollywood Entertainment alone cost the company some $15 million, or $0.08 a share.
The new pricing scheme, a test though it may be, is a recognition that it was mistake to try to compete with Wal-Mart (NYSE:WMT) at the low-end of the rental spectrum. Even so, it seems Blockbuster is unable to simply do things in a forthright manner. When it announced its "no late fees" program, it had to attach a little asterisk next to it because if you were late returning the movie, you were charged a euphemistic "restocking fee." Now with its new higher price policy, if customers question the higher rates, they'll be told it's only a test -- and be charged the lower $14.99 price.
Cut to the chase yourself with these related bits of Foolishness:
- Blockbuster Goes for Broke
- Not Another Price War
- Netflix's Spin Move
- Make It a Blockbuster Fight
- The Drama Builds at Blockbuster
Netflix is a recommendation of Motley Fool Stock Advisor. Try it out for six months risk-free to see what else Tom and David have on their radar screens.
Fool contributor Rich Duprey owns shares in Wal-Mart but rents from Netflix. He does not own any of the other stocks mentioned in the article. The Fool has a disclosure policy.
