April 18 (Bloomberg) -- Netflix Inc., the largest provider of movie rentals via the mail, said first-quarter earnings rose less than analysts estimated and slashed its goal for subscriber growth after Blockbuster Inc. introduced a rival service.

Shares of Netflix dropped 9.4 percent, the most since July, after it said today that net income rose to $9.86 million, or 14 cents a share, a penny less than analysts' estimates. Netflix said it may end the year with as few as 7.3 million subscribers, as much as 13 percent less than a forecast it gave in January.

Netflix, based in Los Gatos, California, lost subscribers after Blockbuster in November began allowing customers to rent movies through the mail and exchange them in stores. Netflix, which relies solely on the mail, said Blockbuster is losing money on its service and predicted it will raise prices.

``I don't think Netflix's growth rate is sustainable,'' said Michael Pachter, an analyst with Los Angeles-based Wedbush Morgan Securities, who has a ``sell'' rating on Netflix stock.

Netflix forecast second-quarter sales of $303 million to $309 million, and said profit would be 18 cents to 24 cents a share, below estimates of 27 cents.

The company gained 481,000 customers in the first-quarter, 30 percent less than a year earlier. Blockbuster added 700,000 online subscribers in the fourth quarter. It releases first- quarter earnings May 2.

First-Quarter Sales

First-quarter sales rose 36 percent to $305.3 million. Net income a year earlier was $4.4 million, or 7 cents a share. In January, the company had predicted it would have 8.4 million subscribers by the end of the year.

Shares of Netflix fell $2.26 to $21.70 at 4:03 p.m. New York time in Nasdaq Stock Market composite trading. It was the biggest drop since July 25. The stock has lost 27 percent in the past 12 months.

Netflix executives said on a conference call today that the threat from Blockbuster, the largest U.S. video-rental chain, may diminish after the company raises prices.

``Netflix obviously sees us as a formidable competitor because of the superiority of our offering,'' Blockbuster spokesman Randy Hargrove said today in an e-mail. He declined to comment about prices, other than to say they haven't changed.

Both Blockbuster and Netflix let customers order DVDs from a Web site. Under the most popular plan for both companies, customers keep three movies at a time and pay $17.99 a month.

Last quarter, Netflix trimmed the price of its cheapest subscription plan to $4.99 a month, in part to fend off Blockbuster, which has six plans that range from $5.99 to $23.99 a month.

Prices

``The larger Blockbuster's business grows, the more money they'll lose,'' said Chief Financial Officer W. Barry McCarthy.

Billionaire Carl Icahn, Blockbuster's largest investor, defended the chain's marketing strategy.

``We look at it as an investment in the future,'' Icahn said in a telephone interview. ``It scales beautifully and profitably when you get to a certain number of subscribers.''

Netflix Chief Executive Officer Reed Hastings said in a telephone interview that the company has tested price changes in some markets and has no plans to implement them. He said an earlier goal of 20 million Netflix subscribers by 2012 is ``unattainable'' if Blockbuster maintains its prices.

``The course we want to stay on is profitability,'' Hastings said. He said Netflix was ``not seriously'' considering buying a brick-and-mortar video-store chain such as Movie Gallery Inc.

Analysts estimated Netflix would earn 15 cents a share in the first quarter, the average of nine projections compiled by Bloomberg. They estimated sales of $304.8 million.

2007 Outlook

Netflix said churn, or the percentage of customers who canceled their service, increased to 4.4 percent in the first quarter from 3.9 percent in the fourth quarter.

Netflix cut its revenue forecast for the year to as much as $1.26 billion, from an earlier forecast of as much as $1.3 billion. The company maintained its guidance for earnings of 76 cents to 83 cents a share in 2007.

The company also said it will buy back as much as $100 million in stock, representing 6.6 percent of its market value, by the end of the year.

Blockbuster predicted in February that its subscriber base would rise by more than a third to 3 million customers by the end of the first quarter.

Netflix in January began providing video streaming for about 1,000 movie titles and said it would spend $40 million this year to build the Web video downloading service, joining companies such as Wal-Mart Stores Inc. and Amazon.com Inc. It now has a database of 2,000 titles available online.

To contact the reporter on this story: Danny King in Los Angeles at dking19@bloomberg.net; Josh Fineman in New York at jfineman@bloomberg.net

Last Updated: April 18, 2007 19:17 EDT