Netflix faces competition from Blockbuster's new rental plan

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Netflix Inc.'s second-quarter revenue report checked in at $303.7 million, a 1 percent sequential decline from the $305.3 million revenue reported for the first quarter of 2007, which the firm attributed to competition and slow subscriber sign-up.

In addition to the drop in stock price, last Tuesday, the online rental giant suffered a blocked Web site for more than 12 hours. Still, revenue for the second quarter of 2007 was $303.7 million, representing a 27 percent year-over-year growth from $239.4 million for the second quarter of 2006.

"As expected, intense competition slowed second-quarter revenue and subscriber growth, even while we delivered near record net income," said Reed Hastings, Netflix co-founder and chief executive officer, in a press statement.

Netflix did not return calls about the Web site problems before this story went to print.

The revenue report comes after fledgling rental retail giant Blockbuster took a new approach to its business last month, challenging Netflix in the DVD-by-mail service with a price war. Blockbuster began offering the popular services that made Netflix king of the market - Blockbuster's most popular three-out unlimited movie plan costs $16.99 a month, $1 a month cheaper than Netflix's similar plan at the time it launched.

For the first time in the company's history, Netflix actually lost more customers than it gained this quarter. Netflix ended the second quarter of 2007 with approximately 6.7 million total subscribers, representing a 30 percent year-over-year growth from 5.2 million total subscribers at the end of the second quarter of 2006 and one percent sequential decline from 6.8 million subscribers at the end of the first quarter of 2007.

Churn for the second quarter of 2007 was 4.6 percent, compared to 4.3 percent for the second quarter of 2006 and 4.4 percent for the first quarter of 2007.

Still, it was a little cheaper to acquire customers in Q2, than in Q1. Subscriber acquisition cost for the second quarter of 2007 was $44.02 per gross subscriber addition and $47.46 for the first quarter of 2007.

In response to Blockbuster's aggressive competition, Netflix has cut its own rental plan prices and balanced that revenue sacrifice with a lower marketing budget. Now plans start as low as $4.99 a month, $1 cheaper than Blockbuster, with the three-out unlimited plan competing at $16.99 a month. Netflix is also offering movie streaming services as well.

"Online DVD rental is a large and attractive opportunity and we remain committed to investing in our long-term growth," said Hastings in the statement. "With yesterday's price cuts in two of our most popular subscription plans, together with the reductions in February and June, we are choosing to lower price and reduce marketing as the most efficient means of sub growth and retention in the current competitive environment."

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