During a conference call with analysts, Netflix chief executive Reed Hastings said he never viewed Blockbuster as a significant threat, but he said he has long been concerned about potential competition from Amazon.
The Internet retailer "was the only company that had the e-commerce ethic, understood the customer base and that was a credible and significant threat," Hastings told the analysts.
Hastings said in an interview yesterday that the growing competition shows the potential of the online rental market.
"Blockbuster and Amazon have realized it is not a niche market and online DVD rental is very mainstream behavior. Both are now scrambling to get a piece of the market."
As a result of cutting its fee, Netflix also reduced its annual profit estimate from 50 cents per share to 27 cents per share. Hastings told analysts that the company planned to break even in 2005 as it increases spending on marketing and expanding its operations. Netflix currently has 29 distribution hubs around the country, allowing it to provide next-day service in all but the largest cities.
The company is planning to double its subscriber base from its current 2 million customers to 4 million in 2005, Hastings said.
But even as it defends against new competitors, Netflix is preparing to open a new front in the online movie rental business. Earlier this year, Netflix signed a deal that will allow it to deliver digital copies of movies over the Internet to TiVo Inc.'s 1.5 million subscribers.
Subscribers would be able to download the movie onto the TiVo digital recorder and replay it, just as they do with television programming that has been stored on the device's hard drive.
Cable and satellite companies are already delivering similar video-on-demand services. In many cases, cable companies give customers up to 48 hours to view the movie with all the same features as a VCR, including the ability to fast forward, rewind and pause a program.
But Hastings said it is likely to be several years, possibly decades, before the movie rental business moves completely online.
"DVDs will be the dominant medium for movies for perhaps as long as the gasoline engine," he said.