WAL-MART PARTNERS WITH NETFLIX, EXITS ONLINE RENTALS

Dan Alaimo

LOS GATOS, Calif. -- Citing the sales growth of DVDs, Walmart.com, Brisbane, Calif., said this month it is getting out of the online subscription DVD business and has formed a cross-promotional agreement with Netflix here, the company that originated the rental concept.

Meanwhile, Blockbuster, Dallas, which now has a similar service, responded by saying it would offer incentives to attract customers of Walmart.com and Netflix.

The Wal-Mart service will be discontinued on June 16, according to the Walmart.com Web site. Wal-Mart customers who sign up with Netflix by that date will get the current, lower Wal-Mart membership rate for one year, which is about $13 a month for two DVD rentals out at one time. Blockbuster is offering Wal-Mart and Netflix customers two months of free service, a free retail DVD and the opportunity to sign up for Blockbuster membership at either Wal-Mart's or Netflix's rates for a year.

In its seven months of operation, Blockbuster has rapidly grown in share of this online DVD rental market, and now represents about 27% for the year to date, vs. 70% for Netflix, which has declined from about 93% a year ago, according to data from The NPD Group, Port Washington, N.Y. Wal-Mart has declined from 2% a year ago to a little over 1% now, NPD reported.

"There's probably little effect from a subscriber standpoint because Wal-Mart's service was running out of steam," Russ Crupnick, president, NPD Music & Movies, told SN. "Clearly, there is value in the marketing deal, much in the way that Netflix derived value from its earlier arrangement with Best Buy." This will give Netflix the opportunity to attract more trial users, he said.

"The bigger issue is that Blockbuster is coming hard at Netflix," Crupnick added. Blockbuster, which had 750,000 subscribers after seven months, has a goal of 2 million subscribers by the end of the first quarter of 2006, said John Antioco, chairman and chief executive officer. Netflix claims to have over 3 million subscribers. Both Netflix and Blockbuster said they offer 40,000 DVD titles.

In the online subscription business, customers go online to request DVDs from the service that are sent from regional shipping centers, and return them by mail. The number of DVDs they can have out at one time depends on the monthly fee they pay. These DVDs do not have to be returned as long as a membership is current.

Walmart.com will now focus on selling DVDs and promote Netflix's service, while Netflix promotes Walmart.com's DVD sales. "We've experienced tremendous growth in our online movie sales, and are committed to enhancing our focus on this business at Walmart.com," said John Fleming, executive vice president and chief marketing officer at Wal-Mart Stores, Bentonville, who oversees Walmart.com.

"This agreement bolsters both Netflix's leadership in DVD movie rentals and Wal-Mart's strong movie sales business, while providing customers even more choices and convenience," said Reed Hastings, co-founder and CEO of Netflix.