Netflix lowered its monthly rate to $18 from $22 starting next month.

Netflix the past 5 days ... and year-to-date

Now Blockbuster is firing back: Next week it will cut the price of its recently launched online service to about $17.50, from $19.

In addition, the coupons that subscribers get for two free video rentals a month at Blockbuster stores also can be used for video games. And customers will get discounts on new and used videos.

"We have invested a significant amount of money in this business," Blockbuster CEO John Antioco says. "And we are not going to allow a competitor to come in and offer better price value and service."

That's sure to give Netflix investors more jitters even after the company's stock plummeted nearly 41% on Friday, with shares closing at $10.30.

Hastings shocked Wall Street with his attempt to undermine Amazon's business models. In addition to lowering the price, Netflix also canceled plans to expand into Britain and Canada. "The land grab for the Internet video market will be in full fury," Hastings said.

With 2.2 million subscribers, Netflix showed that the model works. Customers go online to select the DVDs. Providers mail them in envelopes that are re-used for returns. Most plans allow customers to have three DVDs at a time, sending a new video out each time one is returned — with no late fees.

But now, "It's very unlikely that they're going to dominate the market," says Michael Pachter of Wedbush Morgan Securities.

The reason? "There are very few barriers to entry, and companies with deep pockets can get in and make some money," says Marquis Investment Research's Brian Bolan.

As a result, many analysts consider Netflix a takeover play. With a market value of $537 million, and no single shareholder controlling enough votes to block a sale, some say Netflix could be had for under $1 billion.

"If the stock price stays at $10 very long, then Amazon has to buy Netflix," says McAlpine Associates' Dennis McAlpine. "Nothing else makes sense. And if you're (Yahoo CEO) Terry Semel, you're drooling. He'd have all the (online retail) capability that Amazon has. Even (InterActiveCorp CEO) Barry Diller might want it."

Amazon, for its part, wouldn't discuss possible deals — or even whether it will enter the DVD rental business. "Our customers have encouraged us to offer low-priced DVD rentals, but we have no announcement to make at this time," Amazon's Patty Smith says.

Netflix isn't showing a white flag just yet. Hastings says his company can nearly double subscriptions to more than 4 million by the end of 2005, even though, with the lower prices, it will just break even.

Hastings says that Amazon's potential entry shows that "this is a large and strategically valuable market."

Antioco, however, says the Netflix chief ignores the elephant in the room.

"You make a $4 cash reduction based on rumors of a competitor getting into the business?" he says. "We think (Netflix's announcements) are a direct reaction to our getting into the business."

While he won't say how many people subscribe to his online service, he notes that "after six weeks, we had more subscribers than Netflix had in a year and a half of being in the business."

What's more, "The majority of our subscribers were previous members of other online services." Netflix had 90% of the market before Blockbuster entered.