Wal-Mart halts online DVD rentals
Chain to refer clients to Netflix, which will plug retailer for sales
Netflix Inc., the nation's top online DVD rental company, scored a major coup yesterday when Wal-Mart Stores Inc. agreed to pull the plug on its own web-based movie rental service and refer its customers to its onetime rival.
The two companies also teamed up to promote each other. Wal-Mart agreed to plug Netflix's mail-order movie rental business on its website, while Netflix said it would urge its 3 million customers to buy DVDs from Wal-Mart.
The withdrawal of Wal-Mart leaves Netflix with only Blockbuster Inc. as a direct competitor, but pricing pressure that has prevented Netflix from turning a profit is unlikely to ease. Online rental services allow customers to rent a certain number of DVDs for as long as they want for a flat monthly fee. The DVDs are shipped to customers, and customers ship them back without worrying about late fees. But long term, the business is threatened by cable television video-on-demand services that allow consumers to order and watch movies at home whenever they want.
Blockbuster yesterday tried to capitalize on the Netflix-Wal-Mart deal, offering online rental customers of the two companies two free months of service and a free DVD if they switch to Blockbuster. The movie rental chain already offers two free in-store movie or game rentals every month as part of its online subscription service, which is priced $3 less than what Netflix charges.
Despite the new partnership, Netflix of Las Gatos, Calif., said it still expects to lose between $5 million and $15 million this year despite adding about 1 million subscribers, bringing its total to 4 million. It is expecting a net loss of between $2.2 million and $7.2 million for the second quarter.
Officials at Netflix and Wal-Mart declined to release specific terms of the arrangement but said it was a multiyear deal.
For Wal-Mart, of Bentonville, Ark., yesterday's disclosure showed that the world's largest retailer can't succeed at everything. John Fleming, Walmart.com's chief executive, said the decision was ''really a question of focus. We are really focused on developing products and services that integrate back with our stores."
Wal-Mart launched online movie rentals in 2002 with its typical aggressive pricing, but the business never gained traction and several analysts said they would be surprised if it had more than 100,000 customers. Wal-Mart declined to say how many DVD rental customers it has.
Wal-Mart recently said its first-quarter profits would be up 14 percent -- short of Wall Street expectations -- and warned it may not meet its annual profit goal. Company officials have blamed the subpar results on rising gasoline prices and unseasonably cool weather.
In the movies section of its website, Wal-Mart yesterday was telling its customers to ''sign up with Netflix now." Netlfix says Walmart.com attracts almost 1 million daily visitors; a Wal-Mart official could not be reached to confirm that figure.
The retailer's website said Wal-Mart would discontinue its rental service on June 16, but customers could continue to pay the same monthly fees they are paying now for a year by signing up with Netflix. A link to Netflix.com was on Walmart.com.
Wal-Mart's most popular rental program charges customers $12.97 a month with subscribers allowed to take out two movies at a time. The corresponding Netflix service is $14.99 a month. Netflix's most popular rental service charges $17.99 a month to rent three movies at the same time. Wal-Mart charges $17.36 for the same service, while Blockbuster charges $14.99.
Blockbuster, which dominates the movie rental business, jumped into online rentals last August and says it currently has 750,000 customers. It said yesterday it has increased its online rental library to more than 40,000 titles, the same as Netflix.
Bruce Mohl can be reached at mohl@globe.com. Material from Bloomberg News was used for this report. 
