Blockbuster Inc. introduced on Tuesday an Internet-only DVD rental service priced below a similar Netflix plan, sending Netflix shares down 9 percent as the online movie rental war heated up again.
Citigroup downgraded Netflix shares to sell from hold after its rival's announcement, citing competitive pressures.
Also on Tuesday, Netflix Inc. said it would launch on its Web site this year a series, I Love This Movie!, about classic movies. The two- to three-minute episodes are part of three series to be produced by NBC Universal Digital Studios.
Shares of Blockbuster, the No. 1 video rental store chain, fell nearly 2 percent after it rolled out the new unlimited three-DVDs-out-at-a-time plan at $16.99 -- $1 cheaper than Netflix's most popular plan.
The two have been battling over the fast-growing online DVD rental market since 2004, when Blockbuster launched its online rental service to compensate for falling store rental revenue.
The cheapest Blockbuster By Mail plan will now start at $4.99 for two rentals per month -- the same as Netflix's lowest-priced plan. Blockbuster sweetened the deal with one coupon for a free in-store movie or game rental per month.
The new prices apply only to Blockbuster by Mail to differentiate it from the Total Access plan, which gives online subscribers free in-store rentals when they exchange DVDs at Blockbuster stores.
The Blockbuster By Mail plans lets subscribers cut the time between DVD deliveries by allowing them to return DVDs in stores, but does not provide free in-store rentals.
Citigroup analyst Tony Wible said the price cuts would make it significantly tougher for Netflix to sustain earnings.
We expect that Netflix will eventually have to match the price cuts or lose significant share to Blockbuster, he said.
A Netflix spokesman could not be reached immediately for comment.
Earlier this year, Netflix struck back at Total Access by adding a free Instant Viewing feature to its Web site that lets subscribers watch an unlimited number of streamed movies.
Blockbuster has been losing money since launching Total Access late last year, but the plan has led to an increase in its market share at Netflix's expense.
Blockbuster had 3 million subscribers as of April 1, and projected on Tuesday that the online rental market would grow by 43 percent this year.
Netflix said in April it reached 6.8 million subscribers but cut its year-end subscriber forecast to 7.3 million to 7.8 million from its January outlook of 8 million to 8.4 million.
Netflix saw its shares buoyed as much as 15 percent this week by market speculation that online retailer Amazon.com Inc would buy it. Both companies declined to comment.
JP Morgan analyst Barton Crockett said in a note to clients on Tuesday the new price scheme does not exclude a later price hike for Total Access plans. He said the company maintained its forecast for a $170 million investment in Total Access and said it would not spend more to promote the new prices.
Crockett, who downgraded Netflix shares on Monday, said the move was negative for Netflix.
Shares of Netflix were down 8.8 percent, or $1.93, at a three-month low of $20.00 in late Nasdaq trade. Blockbuster was down 7 cents at $4.00 on the New York Stock Exchange.