Shares of Blockbuster Inc. rose more than 10 percent on Wednesday after Citigroup upgraded the No. 1 movie rental chain to buy from hold in response to new plans aimed at undercutting rival Netflix Inc.
On Tuesday, Blockbuster introduced a mail-only DVD rental service priced below a similar plan offered by Netflix, which pioneered online rentals sent by mail.
Citigroup analyst Tony Wible, who cut his rating on Netflix on Tuesday, raised his rating on Blockbuster late that evening, saying the company's marketing expenses to promote its Total Access online offering are now fully priced into the stock. He also cited improving box office returns and a lessening near-term threat from video-on-demand.
Blockbuster and Netflix have been battling over the online DVD rental market, which is projected to grow by 43 percent this year. Netflix has a larger subscriber base, but Blockbuster has been growing faster since the launch last year of its Total Access plan, which let online subscribers swap DVDs at its stores for free rentals.
JP Morgan analyst Barton Crockett downgraded Netflix shares earlier this week, citing tough competition from Blockbuster.
The new Blockbuster By Mail offering limits subscribers to getting their DVDs by mail only and does not offer free in-store rentals.
Blockbuster has been losing money on Total Access, but the plan helped it surpass Netflix's growth rate this year.
In a note to clients, Wible said Blockbuster By Mail will help Blockbuster improve the costs of Total Access by eliminating in-store content costs and could help Blockbuster gain market share in rural areas from Netflix.
Shares of Blockbuster were up 40 cents at $4.35 in midday trade on the New York Stock Exchange. Netflix shares were down 3.4 percent, or 67 cents, at $19.41 on Nasdaq.