Netflix Woes Deepen With Plunging Stock

Netflix customer Carleen Ho holds up DVD movies, "Talladega Nights" and "Pirates of the Caribbean' that she rented from Netflix, at her home in Palo Alto, Calif., in this Jan. 24, 2007 file photo. Netflix is expected to release quarterly earnings on Monday, July 23, 2007. (AP Photo/Paul Sakuma, file) (Paul Sakuma - AP)

Netflix has been having trouble signing up subscribers since late last year, when Blockbuster began giving its online customers the option of swapping DVDs at one of its stores instead of relying on the mail and waiting at least two days for another movie.

"We are in a very competitive, large battle," Reed Hastings, Netflix's chief executive, said in an interview Monday after the company released its second-quarter earnings. "But we feel like we are still in a great position."

Wedbush Morgan Securities analyst Michael Pachter believes Blockbuster may have exposed Netflix's Achilles' heel by aggressively promoting the convenience of Blockbuster stores to build its online service.

"Netflix has a broken model," Pachter said. "They aren't used to competition and now someone is competing against them very effectively."

Netflix ended June with 6.74 million subscribers, a decrease of 55,000 customers from April. It marked the first time Netflix's total subscribers have declined from one quarter to the next since the service began renting DVDs through its Web site in 1999.

Blockbuster is expected to update its online subscriber count Thursday when it releases second-quarter results. The Dallas-based company ended March with 3 million subscribers after outstripping Netflix's customer growth for two consecutive quarters.

The gains haven't helped Blockbuster financially. The company lost $49 million in the first quarter. Blockbuster last month indicated it might try to reverse that trend by raising the prices of its online service. If that happens, Netflix's earnings during the second half of this year might not shrink as much as management currently expects.

Assuming Blockbuster holds steady, Netflix expects its performance during the second half of the year to lag 2006's pace. Management expects Netflix's full-year profit to range from $42.4 million to $52.4 million, down from an April forecast of $55 million to $60 million. Netflix earned $35.4 million through the first half of this year.