October 28, 2004, 12:00 AM

A pre-emptive price cut in a hot market

Netflix cut its monthly subscription price for an unlimited number of DVDs with up to three out at any time to $17.99 from $21.99. It described its slide as a pre-emptive strike against competition—including expected competition from Amazon.

After years of developing the leading brand in online rentals of movies on DVD, visions of mounting competition are creeping up on Netflix Inc. The pioneer in its still-young market is responding by going all out to increase customer service and build its subscriber base over the next year. "Whoever exits 2005 with the most subscribers will own the market," says a spokesman.

Netflix aims to be that player. On Nov. 1, it cut its monthly subscription price for an unlimited number of DVDs with up to three out at any time to $17.99 from $21.99. It described its slide as a pre-emptive strike against competition.

Netflix, already facing competition from Walmart.com and Blockbuster, fears a move by Amazon, says Netflix CEO Reed Hastings. "We recently learned from several sources that Amazon is likely to enter our market soon," he says.

Amazon is keeping its plans for online DVD rentals close to its vest but admits to having good reason to serve the market. "Our customers encouraged us to offer low-priced, online DVD rentals, but we have no announcement to make at this time," an Amazon spokesman says.

Netflix is banking on continued strong growth in online DVD rentals, which it figures will be even stronger in five years than it is today. As of the Sept. 30 close of its third quarter, Netflix had reached a new high in number of subscribers at 2.34 million, as revenue rose 96% year-over-year to a record $141.6 million. Net income grew more than fivefold to $18.9 million.

Digital movies

But it`s also preparing for any eventual shift to digital movie downloads, a market still limited by bandwidth. It recently signed an agreement with TiVo Inc. to develop a digital movie download service from Netflix.com to TiVo`s digital movie players. TiVo has 1.9 million subscribers, though it`s unclear how many of those already subscribe to Netflix. The combined subscriber base, Netflix says, would give the two companies a strong position to serve both digital downloads and online DVD rentals.

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