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Netflix tries lower prices to stay ahead

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Kai Ryssdal: Right after the closing bell this afternoon the online DVD-rental company Netflix reported higher-than-expected second-quarter profits. That suggests it may be holding its own in its brutal fight with rival Blockbuster. But investors may be wondering more about the future, now that Netflix has announced another cut in prices for some of its services. Marketplace’s Jeff Tyler reports.

Jeff Tyler: Netflix cut a dollar off the price of its most popular services. You can now rent by mail one DVD at a time for about nine bucks a month. The company is reacting to pressure from Blockbuster, which has gotten more aggressive about courting online customers.

Speaking to Marketplace last December, Steve Swasey with Netflix dismissed one of Blockbuster’s promotions as a Hail Mary pass.

Steve Swasey: The proverbial football play where you throw the ball as far downfield and hope for the best.

Now it appears that pass may have found its mark. Blockbuster has almost doubled its online customers in the last six months to about 3 million subscribers. Meanwhile, Netflix, with about 6.7 million customers, actually lost subscribers in the last quarter.

Derek Brown: Blockbuster has clearly stolen a lot of Netflix’s thunder over the last 6 to 12 months.

That’s Derek Brown, an equity research analyst with Cantor Fitzgerald. He says the price war is starting to eat away at Netflix’s bottom line.

Brown: Netflix is likely taking out quite a bit of its own profit by lowering prices.

But don’t expect Netflix to reverse course anytime soon. Analyst James McQuivey with Forrester Research figures Netflix can sustain its low prices for five years.

James McQuivey: Netflix is hoping that they can maintain momentum as the world goes to digital downloading or video-on-demand, they’ll be able to carry their brand into that future digital world.

Downloading videos has not caught on with the general public yet. And Netflix only offers a limited selection of digital titles. McQuivey says Netflix needs to expand its online library to give customers more options.

I’m Jeff Tyler for Marketplace.

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