Blockbuster Online: Now $14.99 a month.

Blockbuster has always been slow to realize what its customers really
want: Low cost DVDs, low cost DVD rentals, a large, diversified
selection and, most importantly, no late charges.

Even Blockbuster management is quick to admit that its stores have
little to offer outside of its traditional in depth offerings action
junk and lowbrow comedies: "We've discovered that a high percentage of
the titles our online customers want to watch are ones that we don't
generally stock in our stores, and we wanted to position those titles
around the country. It's really a different customer set than our
in-store customers."

In its latest Johnny-Come-Lately move, Blockbuster is attempting to pull
the rug out from under Netflix -- and possibly Amazon -- by slashing its
online DVD subscription rate by 17%.

Is this a shrewd business decision or a last ditch act of desperation?

*** *** ***

DEC. 22 | Blockbuster tried to take some of the joy out of Christmas for
rival Netflix on Wednesday. The No. 1 rentailer slashed the price of its
online rental subscriptions to $14.99 a month.

The cut makes Blockbuster's online offering $3 a month cheaper than
Netflix's, which goes for $17.99, and sent shares of the online rental
pioneer plunging more than 7%.

Analysts who have followed the price war between video rental's old
guard and new speculated that Netflix would have little choice to
respond in kind, although a Netflix spokesperson denied any such plans.

"We're determined to be the high-quality, low-cost provider in this
space," Blockbuster online VP and general manager Shane Evangelist said.
"It was always our plan to get more competitive on price once we made
sure we had the operational side figured out."

Blockbuster launched its online rental service in August and has said it
aims to sign up 500,000 subs by the end of the year.

Evangelist said yesterday that the company is "pleased" with its
progress so far but declined to provide hard numbers.

Subscribers get unlimited DVD rentals, with a maximum of three out at a
time, plus coupons good for two free in-store rentals each month.

Blockbuster's entry into the online rental business, meanwhile, touched
off a fierce battle for supremacy with market leader Netflix, which has
more than 2.5 million subs.

This new price cut is the second in three months for Blockbuster, which
has gone from an initial price of $19.99 to $17.49 and now $14.99.

Netflix cut the price of its basic subscription package in September,
from $21.99 to $17.99.

At the time, Netflix CEO Reed Hastings said the price cut was a
pre-emptive move against the expected entry of online giant Amazon.com
into the DVD rental arena.

Since then, Amazon has launched a service in the U.K. but has not yet
indicated plans for the U.S.

Analysts speculated Wednesday that Blockbuster's latest move also could
be aimed in part at Amazon.

"Maybe they're trying to scare Amazon," said Dennis McAlpine of McAlpine
& Assoc. "I'd certainly be scared if I were Amazon. But meanwhile,
they've lowered the profitability for everyone, including themselves."

Netflix shrugged off any impact from Blockbuster's move.

"None of the things they've announced recently has had any impact on our
subscriber growth," a spokeswoman said. "We have no plans to lower our
price in response to their latest move."

The battle for online subscribers underscores the dramatic shifts in the
video rental business over the past two years.

The popularity of cheap DVDs has taken people out of Blockbuster and
into Wal-Mart and Best Buy, putting pressure on the rental giant's
bottom line.

Netflix also introduced people to the joys of no late fees--long a sore
point for Blockbuster customers--siphoning more people out of rental
stores.

"We see [Blockbuster's price cut] as another sign of the death of the
bricks-and-mortar video rental business," the Netflix spokeswoman said.
"Clearly, they see a lot of people moving online."

Since its split off from Viacom earlier this year, Blockbuster has been
racing to catch up with market trends.

While battling Netflix over price, Blockbuster moved earlier this month
to eliminate most late fees for its in-store renters. It's also pushing
aggressively into videogames and movie and game trading in an effort to
lower its dependence on basic movie rentals.

In its boldest move, it also has made a $1 billion bid to acquire its
main bricks-and-mortar rival Hollywood Entertainment.

"To date, more than half of our online customers are new to Blockbuster
or reactivated, meaning they have not shopped at our stores in the past
six months," Blockbuster's Evangelist said. "Plus, through the two free
monthly store rental coupons offered to online subscribers, we are
giving those customers an incentive to come into our stores, where
they're discovering new offerings, like trading and games."

Yesterday's move also might signal a shift in Blockbuster's online
strategy, however.

In addition to the price cut, the company said it will more than double
the number of distribution centers from which it mails out DVDs to 23.
It also is increasing the number of copies of new releases it buys for
its online customers and is bumping up the number of titles offered from
25,000 to 30,000.

As originally sketched out by chairman/CEO John Antioco, Blockbuster's
online plans called for relying on the chain's 5,000 U.S. stores as
shipping points rather than building dedicated distribution centers.

It also planned to leverage its existing store inventories to service
its online customers rather than maintaining a separate stock.

The latest moves suggest the emphasis is shifting away from an
integrated in-store/online approach in favor of building a standalone
online operation to rival Netflix's.

Earlier this month, the company also revealed that it is scaling back
planned new store openings in 2005.

"I think the likelihood of combining in-store and online is going by the
wayside," McAlpine said.

Evangelist denied the plans have changed, however.

"We will still be shipping out of the stores, but in the meantime, we
want to make sure we can deliver the highest quality service," he said.
"We've discovered that a high percentage of the titles our online
customers want to watch are ones that we don't generally stock in our
stores, and we wanted to position those titles around the country. It's
really a different customer set than our in-store customers."

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One-Shot Scot