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Saturday, October 16, 2004 - Page updated at 12:00 A.M.
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Amazon rumors send Netflix stock tumbling

By Monica Soto Ouchi
Seattle Times retail reporter

BLOOMBERG NEWS
Netflix ships rented DVDs to subscribers, and the company CEO warns that it expects Amazon.com to be a competitor.
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Online retail giant Amazon.com hasn't indicated whether it would enter the DVD rental service business, but rumors that it might sent shares of Los Gatos, Calif.-based Netflix into a tailspin.

Shares of the largest online DVD rental service yesterday were nearly halved, falling 40.9 percent to $10.30 a share — its lowest level since April 2003.

The dip came after Netflix Chief Executive Reed Hastings told analysts on the quarterly conference call that the company planned to reduce its subscription fee in anticipation of Amazon.com's entry into the business.

Amazon.com spokeswoman Patty Smith said the company's customers have encouraged it to offer "low-priced online DVD rentals."

"But we have no announcements to make at this time," Smith said.

Netflix, which charges $21.99 a month for customers to rent and receive DVDs by mail, will reduce its price to $17.99 starting next month.

Movie-rental chain Blockbuster followed suit yesterday, saying it would reduce its online rental subscription to $17.49 from $19.99.

Hastings said he heard from multiple sources that Amazon.com plans to introduce the service within six weeks to six months and felt obligated to tell investors because the news could affect the company's stock price.

"They're the gold standard in e-commerce, and for us to beat them is to beat Brazil in the World Cup," Hastings said. "It is an incredible challenge and honor, and we intend to do it."

While Amazon.com sells everything from shoes to toasters, sales of media products — books, music, videos and DVDs — continue to be its largest draw. Media sales accounted for 74.8 percent of its $1.4 billion in third-quarter sales.

Ed Harris, managing partner of Bellevue-based Razor Capital, warned investors in February to sell their Netflix shares because the online DVD rental business is not hard to copy — especially for large companies such as Amazon.com.
 
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DVDs are light, easy to store, and inexpensive to ship. Figuring out how many DVDs to buy is relatively simple, Harris said.

"If you think about the business decision-making that goes into it, this one's pretty straightforward," Harris said. "You're going to stock, in order, the movie that's most in demand to the movie that's least in demand."

Monica Soto Ouchi: 206-515-5632 or msoto@seattletimes.com

Information from Reuters is included in the report.

Copyright © 2004 The Seattle Times Company

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