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Blockbuster enters direct competition against Netflix.
This is just another battle in the long war between both video rental companies, but Blockbuster is much more trusted by shareholders than Netflix.
Movie Gallery Inc., a current Diligent Investor portfolio position, is my favorite rental stock for its potential in the rental kiosk sector.

Retail Stocks: Online Video Rental Fight Club

Blockbuster Inc. (BBI:NYSE) is finally in direct competition with Netflix Inc. (NFLX:NASDAQ).

Late last year, the company released its Blockbuster Total Access program, which allowed subscribers to order movies online to be shipped to their mailboxes. Then they could return them in the mail, or back to the nearest Blockbuster storefront, in exchange for another movie for free. The company has charged $17.99 for the service, which offers unlimited rentals per month.

Now, the company is initiating an exclusive mail-order program that allows customers to rent three movies at a time, practically the same plan that Netflix has built its business on all these years. This program is $1 less than its Blockbuster Total Access plan, but does not allow customers to return movies at storefronts for free movie trade-ins.

Currently, Netflix charges $17.99 for the three-movie-at-a-time “most popular” plan and Blockbuster will only charge $16.99.

Additionally, Blockbuster has initiated a “one-movie-at-a-time” mail order movie option that matches Netflix's price of $4.99 per month.

This is a strong move from Blockbuster, as the online rental market is expected to increase a total 43% during 2007. This is a great opportunity. Netflix itself, in only six years, pushed the industry to sizeable numbers: more than 8.8 million people currently subscribe to some type of online video rental service. Online DVD rentals netted $1.2 billion as of the end of 2006. Expectations by 2010, at the earliest, are that online DVD renters could total 20 million people, netting industry totals of $2.7 billion in rentals.

Retail Stocks: Another Battle in the Online Video Rental War

If you remember, about a year ago, there was a rift between Netflix and Blockbuster Inc. (BBI:NYSE): Netflix sued Blockbuster in a patent infringement lawsuit, claiming that Blockbuster was “illegally copying its ideas” by expanding its rental business to the Internet.

Of course, the case didn't gather much steam. Blockbuster's Total Access program was just a bit different, mixing online movie rentals with store video rentals for one basic fee. Subscribers can rent movies online, and then either mail them back or take them to a Blockbuster storefront as a return or exchange for another movie. That's much different from Netflix's business, which currently has no storefronts and only operates its business online.

It doesn't look like Netflix is going to voice a peep about Blockbuster's newest online video rental service.

Netflix was doing well by shareholders as rumors concerning a possible buyout by Amazon.com Inc. (AMZN:NASDAQ) pushed NFLX up to its premium price of $26 per share. Once fresh competition was apparent with Blockbuster's new program features, NFLX dropped back below $20 per share, and was downgraded by J.P. Morgan and Citigroup. On the other hand, Citigroup upgraded Blockbuster stock to “buy” from “hold.”

Overall, this seems to be Blockbuster's year. Shareholders have seen Netflix drop more than $6 per share or 23% in only the last six months, but its technicals continue to point to continued selling. Blockbuster has dropped 22%, but it's on a new rising trend and continues to grow through its Blockbuster Online Access program subscriber base and now it's throwing down the gauntlet against Netflix.

Retail Stocks: My Favorite Video Rental Stock is neither Blockbuster nor Netflix

Currently, my favorite retail rental stock is Movie Gallery Inc. (MOVI:NASDAQ), a current company holding in the Diligent Investor portfolio. MOVI is setting up countless video rental kiosks in malls and outside fast-food restaurants, as well as increasing its video game rental storefronts and services, another fast-moving industry sector.

Kiosk rentals could reach $270 million by the end of 2007, and $1 billion by the end of 2007.

Of course, if you're set on playing the age-old Blockbuster versus Netflix battle (I think it's around 120 by now?), Blockbuster is the certified winner with a knockout. I believe that Netflix's “freshness” has been lost on shareholders, and most people have trusted Blockbuster's for a lot longer.

Its choice to face Netflix head-on gets an A+ in my book.

***

Ann Sosnowski is a small and mid-cap stock analyst for Taipan Financial News. She is the editor of Diligent Investor, a monthly newsletter that balances conservative and moderately risky investments that pertain to current market trends. She is also the editor of Diligent Investor Micro-Cap Hot Sheet, a monthly newsletter that finds the hottest penny and micro-cap stocks on the market.

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