Last week, I wrote about Blockbuster and their new low on-line DVD rental price of $14.99 per month. I also said that I expected Netflix to lower their prices.
Well, I was incorrect. Netflix is now on the record as saying they will not lower their prices any further. The reason is the oldest in the book...profitability. Let me explain.
When I signed up with Netflix a few years ago, the price was $19.95 per month. Earlier this year, they raised their price to $21.95. Then, in November, they lowered their price to $17.99 per month in anticipation of Blockbuster's new rental policy and in anticipation of Amazon.com getting into the business.
When they announced their new lower prices in October, their stock price took a major tumble. They don't dare lower their profitability anymore. But, in their latest announcement regarding Blockbuster, Netflix said that by lowering their prices to $14.99, Blockbuster is telling the world that video rental stores are obsolete. And they might have a good point.
Blockbuster still sells their monthly video in-store plan for $25 while selling the same service on-line for $14.99. They are, in effect, telling people to shop on-line. Netflix feels that this will drive a lot of consumers out of Blockbuster stores to them.
Blockbuster also recently changed their late fee policies. Now, after a short grace period, late customers will automatically be charged the full price for the DVD and will now own it. Since late fees account for a fair portion of the company's income, this new policy did not sit well with stock market analysts. In fact, with this policy and the new on-line rental fee, some analysts have move Blockbuster's stock to a "Sell" rating. The "StockScouter" rating system currently rates their stock at 2 out of 10, meaning it is a very risky purchase.
Blockbuster will also be spending more money on 28 new on-line distribution centers around the country rather than building new stores.
And as one final point, Wal-Mart has been selling their on-line service for a few months now at the rate of $15.54 per month and it has not dented the Netflix share of the market.
I am not sure what all this means for us consumers, except that I am still not changing my position and will stay with Netflix. You just can't beat good customer service. I mailed a movie back on Friday, it got there today (Monday) and my new movie will be here Wednesday. And I still have over 25,000 titles to choose from for my next rental.
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