Wal-Mart Stores is handing off its online DVD rental business to Netflix, signaling the world's largest retailer couldn't beat the Internet upstart at its own game.


SAN FRANCISCO (AP) -- Wal-Mart Stores is handing off its online DVD rental business to Netflix, signaling the world's largest retailer couldn't beat the Internet upstart at its own game.

The May 19 David-defeats-Goliath announcement boosted Netflix's shares, which gained 63 cents, or 4.1%, to close at $16.13 on the Nasdaq stock market. The shares shed 13 cents in after-hours trading, but soared as high as $19.27 earlier in the day.

Wal-Mart is offering its existing online DVD rental customers the chance to continue their subscriptions with Los Gatos, Calif.-based Netflix at their current price for the next year. Those who do not sign up with Netflix by June 17 will lose their service. Wal-Mart plans to continue promoting the Netflix service on its Web site.

In return, Netflix will urge its 3 million subscribers to buy DVDs from Walmart.com.

The companies did not disclose how many customers Netflix will inherit nor the financial terms of their partnership. About 70% of Wal-Mart's DVD rental customers pay $12.97 per month for the right to check out up to two titles at a time. Most Netflix customers pay $17.99 per month for three titles at a time. Wal-Mart charges $17.36 per month for three titles.

In a bid to disrupt the new alliance, Blockbuster Entertainment offered two months of free service to all Netflix and Wal-Mart subscribers willing to defect. After the first two months, the defectors will be allowed to keep their former subscription rates for the next year. Customers who switch to Blockbuster also will be able to pick a DVD of their choice to keep.

Netflix still expects to lose $5 million to $15 million this year as it tries to thwart Blockbuster's aggressive push into online DVD rentals, but getting Wal-Mart to drop out of the competition represents a major victory for the tiny company.

It takes Wal-Mart less than a day to surpass Netflix's 2004 sales of $506 million.

"It's a great endorsement," Netflix CEO Reed Hastings said during an interview May 19.

Despite its size and merchandising savvy, Bentonville, Ark.-based Wal-Mart could not overcome Netflix's head start in the rapidly-expanding niche of online DVD rentals. Wal-Mart concluded the service did not blend in well with its stores, said John Fleming, an executive VP who oversees the company's online operations.

Wal-Mart is believed to have fewer than 100,000 online DVD subscribers, said industry analyst Dennis McAlpine of McAlpine Associates. "This is a nice deal for Netflix, but it still doesn't mean Netflix will win the game," he said.

Besides gaining a potential influx of new customers, Netflix hopes to introduce its brand to a wider audience through the promotions on Wal-Mart's Web site.

With 19.7 million visitors in April, Walmart.com attracts twice as much traffic as Netflix, which had 8.4 million visitors, according to comScore Media Metrix. Just 9% of the people who visited Walmart.com last month also spent time on Netflix's Web site, comScore said.

Blockbuster plans to spend $120 million on its online expansion this year. With about 750,000 subscribers currently, Blockbuster expects to boost that total to 2 million during the next 10 months.

Meanwhile, Netflix is aiming to add an additional 1 million subscribers by the end of the year.

The cutthroat competition has battered Netflix's stock, which has plunged from a high of $39.77 reached early last year.

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