Free DVDs. Free shipping. That may be where the competition for online DVD services is heading. Blockbuster (BBI) has launched a new service allowing its customers to get DVD by mail for as little at $4.99 a month. NetFlix (NFLX) will probably have to drop its price to match the new program.
The Blockbuster Total Access plan already allows people to order DVDs by mail and return them to the company’s stores. According to The Wall Street Journal that operation continues to lose money.
Netflix shares fell over 8% on the news of the Blockbuster plan and traded below $20.
Competition in the market for film rentals has sent shares in NetFlix down almost 25% since the beginning of the year. Blockbuster’s shares are down almost as much.
But, the two companies may be competing in a market that is already dead. The Blockbuster model of renting movies through stores is over a decade old and was replaced to a very large extent by the NetFlix model of getting DVDs through the mail.
But the VOD programs offered by cable companies and new technologies like AppleTV (AAPL) and the Amazon (AMZN) Unbox have made getting physical DVD obsolete. Warner Brothers is testing a program for releasing its films on VOD at the same time it ships DVDs. That probably is not a good thing for the like of NetFlix and Blockbuster, but a studio makes about 70% of the sale price of a VOD-delivered movie against 20% of DVD revenue. The industry economics are pressing for the new digital model as much as technology is.
Blockbuster and NetFlix are going to have to put together programs which make DVD rental almost free. But, that could make their stock prices worth close to zero as well.
Douglas A. McIntyre can be reached at [email protected]. He does not own securities in companies that he writes about.
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