When Blockbuster (NYSE:BBI) announced that it would be dropping the monthly fee for its online mail-order DVD rental service to $14.99, I turned my attention to niche pioneer Netflix (NASDAQ:NFLX). My unspoken request ran the breadth of four simple words: Please don't do it.
Netflix and Blockbuster have each proven that they mean business by waging a margin-munching price war this year. Netflix fired the first shot as a way to keep Amazon (NASDAQ:AMZN) away. Blockbuster has now lowered the bar as a way to stay close to Netflix and bury Wal-Mart (NYSE:WMT) in this booming field.
Combined, these two companies with everything to lose if they fail in their online endeavors -- and, trust me, that applies to Blockbuster too -- have proven themselves to be fiscal masochists. Wall Street has had no problem whacking away at the companies, either.
But as bruised up as Netflix may be on the outside, its noggin appeared to be intact when it revealed that it would not be following Blockbuster's lead with a second price cut of its own. Amen to that!
Blockbuster knows that the future belongs to DVD and video game subscription plans. While it would prefer to wage this war locally -- at its blue and yellow stores -- the public has been won over by the convenience of marrying the Internet with traditional postal delivery. That's why it has no problem undercutting Netflix. Its future demands it.
That's why if the limbo stick pricing war ever got to the point where Netflix was giving away its service, you can rest assured that Blockbuster would be cutting $3 monthly checks for those willing to try its rental service. Naturally I'm exaggerating, but it has become apparent that mere profitability wasn't either company's choke point here. Someone had to draw the line.
Back in August I outlined a few ways for Netflix to grow its lead. While I never really expected the company to follow my suggestions of loading up on offline kiosks and blue movies, I think it should be fairly obvious that Netflix needs to start offering video games -- and perhaps even PC games and music CDs -- before Blockbuster does. The fact that Blockbuster has been offering video games for years at its stores -- and that online subscribers are given two free monthly in-store rentals that can be used on game titles -- means that Netflix better connect the dots before Blockbuster (or, gulp, Amazon) does.
Netflix can do even more. So tomorrow I'll be back with some other ways for Netflix to polish its Rule Breaker glow before it fades away.
Will lower prices win you over when it comes to DVD rentals? What are some other ways for Netflix to grow its earnings potential? All this and more -- in the Netflix discussion board. Only on Fool.com.
Longtime Fool contributor Rick Munarriz has been a Netflix subscriber -- and investor -- since 2002. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.
