Netflix prepares for a price war

The company is cutting prices to do battle with the big boys.
SAN FRANCISCO (AP) -- The future suddenly looks shaky for online DVD rental pioneer Netflix Inc. -- a plucky home entertainment upstart that managed to hold its ground after retailing giants Wal-Mart Stores Inc. and Blockbuster Inc. invaded its turf.
Convinced Amazon.com Inc. is ready to join the fray, Netflix is girding for a fierce price war that figures to make or break the Los Gatos-based company.
Netflix is betting an upcoming 18 percent reduction in its monthly service fee will lure millions of new subscribers, extending its reign as king of online DVD rentals even though its profits are expected to disintegrate amid the stiffer competition.
Investors aren't nearly as confident.
Netflix's stock has plunged 75 percent during the last nine months, reflecting fears that the 5-year-old company is destined to become another dot-com pipe dream.
A takeover target?
Many industry analysts now view Netflix -- with 2.2 million subscribers -- as a prime takeover target, with Amazon and Yahoo Inc. shaping up as the most logical suitors.
The company's chief executive, Reed Hastings, brushed off the possibility of a takeover in an interview with The Associated Press, saying his company is focused on achieving its new goal of quadrupling the $500 million online DVD rental market over the next two years.
"We don't feel particularly vulnerable because Netflix is a strong, independent company. We feel very confident about our future," Hastings said.
"The next year will be painful for investors, but great for consumers."
Hastings's prediction is based largely on inside information that convinced him that e-commerce leader Amazon is ready to duplicate Netflix's approach to DVD rentals.
Netflix's rental service requires customers to pay a monthly subscription fee to create a personal account so they can make DVD rental requests online.
Customers receive up to three titles at a time through the mail. The system allows customers to keep the DVDs for as long as they want, with no late fees, before each disc is mailed back in a postage-paid envelope supplied by the company.
When a disc returns, Netflix mails out the top title on the customer's wish list -- if it has that title in stock.
The Amazon threat
Seattle-based Amazon declined to comment on its plans.
When Wal-Mart and Blockbuster made their move into the market nearly two years ago, Netflix barely flinched. With it business still thriving, Netflix even raised its monthly subscription fee from $19.95 to $21.95 about four months ago.
The Amazon threat, though, prompted Netflix to backpedal and lower the monthly fee to $17.95 effective Nov. 1.
Netflix expects to remain barely profitable as the company slugs it out in its bid to reach 4 million subscribers by the end of next year.
Like many tech entrepreneurs, Hastings expects the home entertainment market to shift to a delivery system that will send digital movies over the Internet.
That probably won't happen for another five to 10 years, Hastings estimated, but when it does he wants Netflix to have 10 million to 20 million subscribers so the company has a mass audience that will appeal to movie studios.
Prices
Netflix must first survive a potentially brutal fight with much bigger companies.
Dallas-based Blockbuster already is undercutting Netflix by lowering the monthly subscription fee for its online rental service from $19.99 to $17.49, effective today. Wal-Mart's subscription fee is $18.76 per month to check out up to three titles.
Amazon's vast online audience -- the retailer attracts about 40 million visitors during its busiest months -- gives it a significant financial advantage over Netflix because it probably won't have to spend as much money to find subscribers, said Piper Jaffray analyst Safa Rashtchy.
During the first nine months of this year, Netflix spent an average of $36.06 to sign up each new subscription.
Rashtchy said Amazon may be better off buying Netflix because Netflix already has accumulated valuable expertise, as well as a network of 29 DVD warehouses scattered across the country to assure DVDs arrive in customer mailboxes with a day or two of a video return. What's more, Netflix's market value has slipped to roughly $650 million, down from more than $2 billion in late January.
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