Wal-Mart, Netflix Team Up for DVD Rentals

Wal-Mart Stores Inc (WMT), the world's largest retailer, on Thursday said it was closing its online DVD rental business and would direct customers to Netflix Inc. (NFLX), the company that pioneered online rentals.

Shares of Netflix jumped 19 percent, reaching their highest level since October when the company cut prices to compete with an online service launched by rival Blockbuster Inc. (BBI).

Under the agreement, Netflix will promote Wal-Mart DVD sales to its 3 million subscribers, and Wal-Mart will offer its online customers the opportunity to sign up with Netflix at their current subscription price for a year.

Netflix will promote Wal-Mart's online movie sales business both on the Netflix Web site and in mailers sent to Netflix subscribers.

The partnership radically changes the competitive landscape for the nascent online DVD rental industry.

"This is big," Fulcrum Global Partners analyst Stacey Widlitz said. "That's pretty significant for (Netflix). I would say they are gaining back some traction in the fight with Blockbuster."

Shares of Netflix, the world's largest online DVD rental service, rose $3.00 to $18.50 on Nasdaq, while shares of Wal-Mart rose 27 cents to $47.85.

Netflix said in a statement that the addition of Wal-Mart's subscribers would not "materially impact" its subscriber growth, and it would not revise its guidance. Netflix has said it expects to reach 4 million subscribers by the end of 2005.

Wal-Mart launched its online DVD rental service in late 2002, but never promoted the service heavily. Its departure from the fast-growing online rental industry leaves only Netflix and Blockbuster, which has reported having more than 750,000 subscribers.

Wal-Mart did not disclose its number of subscribers.

Walmart Online, in an advertisement on its Web site, said the company will not accept new members and offered a link to Netflix, where Walmart.com customers can sign up for the DVD rental service at their existing Walmart rates for one year.

Online retail giant Amazon.com Inc. (AMZN), which launched an online DVD rental service in Britain last year, has also been expected to enter the U.S. rental market.

Widlitz said the agreement between Netflix and Wal-Mart probably would not deter Amazon from entering the U.S. market, leaving the possibility of a similar partnership open to Blockbuster.

"I don't think the battle is over here," she said. "To team up with Amazon is probably as powerful on the Web as teaming up with Wal-Mart."

The two companies have been locked in an expensive price war since last fall, when Blockbuster launched its online service and twice undercut Netflix's subscription price.

Shares of Netflix plunged by as much as 75 percent since last summer, hitting a two-year low of $8.91 in March, as it changed its strategy to sacrifice profits for growth in the face of growing competition.

Netflix will take over Wal-Mart's online service, allowing its customers to pay the $12.97 per month guaranteed by Wal-Mart for 12 months, the companies said.

The Wal-Mart Web ad also provided a link to allow its subscribers to transfer their services, including request lists for specific DVDs, to Netflix.