Netflix, Blockbuster vie for rental supremacy

One is a Goliath and the other a David.

Industry rivals Blockbuster and Netflix both rent videos and DVDs, but while Blockbuster works out of more than 5,600 retail stores nationwide, Netflix uses the Internet and mail. The competition between the two companies is heating up, forcing both sides to reinvent themselves.

"They're certainly gunning for us and us for them but that's really what serves the consumer," says Reed Hastings, CEO of Netflix, whose company generated $272 million in revenue last year — only chump change compared to the nearly $6 billion in annual sales for Blockbuster.

FREE VIDEO Netflix, Blockbuster vie for supremacy Dennis McAlpine, media analyst with McAlpine & Associates, discusses the rivalry between Netflix and Blockbuster during an interview on CNBC. CNBC

But the 5-year-old Internet site has already attracted more than 2 million subscribers and hopes to triple that number by 2008.

"Well we've had a very clear message that consumers could rent all the movies they want — no late fees — for a single flat fee, $22 a month ... and it appeals to a large number of people," says Hastings.

On the other hand, about 50 million people in more than two dozen countries rent movies at Blockbuster, which has a store within 10 minutes of 70 percent of the U.S. population.

"Our mission right now is to transform Blockbuster from a place you go to rent movies to a place you go to rent or buy movies or games new or used, pay by the day, pay by the month, online or in-store," says John Antioco, CEO of Blockbuster.

Facing growing competition, not only from Netflix, but also from mass retailers like Wal-Mart and BestBuy, Blockbuster is making plans to reinvent itself, such as launching its own online rental service by the end of the year.

"Blockbuster's the real challenge for Netflix and the challenge for the market because Blockbuster sees its core business starting to deteriorate on a year over year basis ... Blockbuster's clearly on the defensive here, and they will try to have impact on this market," says Jim Friedland of SG Cowen, a U.S. broker-dealer that provides securities and investment banking services.

And although shares of Netflix have outperformed Blockbuster over the last 12 months, investors worry that new technology like digital video recorders and movie on demand will kill the video rental business.

Both companies say that fear is overblown.

"There are more people that rent movies than go to the theater than buy movies.  So, in spite of the fact that people think rental is dying, it's not.  It's still number one as far as the consumer is concerned," says Antioco.

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