It’s an interesting battle that’s been heating up—Netflix (Symbol: NFLX) vs. Blockbuster (Symbol: BBI).

Blockbuster was the new kid on the block. Netflix was the Internet-savvy rental service that’s been growing like mad since 1999.

If you’ve seen the commercials, you know that Blockbuster is playing up their brick and mortar stores as an advantage over Netflix. And it appears to be working.

Recently, Netflix announced that it lost subscribers—55,000. More significant than the lost subscribers is the fact that this is the first time Netflix has announced a decline in subscribers—proof that Blockbuster is affecting them.

As a way to fight back, Netflix touted that, unlike Blockbuster, it offered movies you could watch instantly online. That all changed today.

Blockbuster announced Wednesday that it’s buying Movielink—a digital movie-download service.

The company looked at Movielink earlier this year, but didn’t make a move. They’ve no doubt seen that the ability to watch movies instantly is the next progression in video rental.

With this deal, Blockbuster removes a key marketing point from Netflix. Additionally, Blockbuster will now have one of the larger catalogs out there.

While Netflix has been offering their instant service since earlier this year, their catalog is a bit dated. They are working to improve it.

According to an AP article, Netflix spokesman Steve Swasey said there have been five million uses of their instant movie service. Their catalog currently contains 4,000 movies, Swasey said.

Blockbuster shareholders are perhaps getting a glimpse of things to come.

New Chief Executive, James Keyes, said that this is just a “first step” towards their vision of making Blockbuster videos available to computers, televisions, cell phones and other portable devices.

While terms of the deal weren’t disclosed Keyes mentioned that it was an all-cash deal.

Netflix currently has about 6.7 million subscribers. Blockbuster’s Total Access, which has hurt Netflix’s growth, has about 3.6 million subscribers.

For the second-quarter of 2007, Netflix reported a loss of 55,000 subscribers while Blockbuster reported a gain of 600,000 subscribers.