June 2, 2005, 12:00 AM

The battle tightens between Netflix and Blockbuster

Netflix Inc.’s takeover of Wal-Mart Stores Inc.’s online DVD rental business brings Netflix a step closer to rival Blockbuster Inc., but the contest is far from over, observers say.

Netflix Inc.’s takeover of Wal-Mart Stores Inc.’s online DVD rental business brings Netflix a step closer to rival Blockbuster Inc., but the contest is far from over, observers say.

Under the agreement with Netflix, Wal-Mart will close its online DVD rental business and provide a link to Netflix that allows its existing DVD rental customers to become Netflix subscribers at the current Wal-Mart rate, good for one year. Walmart.com charges $17.36 a month with the option to have three movies out at one time. Netflix charges $17.99.

In return, Netflix will promote Wal-Mart’s online DVD sales at its site and in mailers to its 3 million subscribers. “For Wal-Mart, this business is a drop in the bucket but it represents potentially significant upside for Netflix,” says Dan Hess, senior vice president of comScore Networks Inc., which tracks and analyzes web sites.

Not only will Netflix benefit from the initial wave of subscribers converting from Wal-mart to Netflix, it will also gain from the advertising and promotion partnership, he says. “The explicit endorsement of Netflix by Wal-Mart may resonate with some consumers that otherwise would be reluctant to try the brand,” Hess says.

But while the agreement gives Netflix a boost, Blockbuster remains a formidable rival, he says. “Blockbuster represents a very powerful competitor with deep pockets and a huge offline presence that no other player has,” Hess says.

In response to the Wall-Mart/Netflix deal, Blockbuster is offering two months free service to Walmart.com and Netflix subscribers who switch to Blockbuster. Blockbuster will also give them a free DVD of their choice and the oppor-tunity to subscribe to Blockbuster Online at their current Walmart.com or Netflix price for the next year.

Netflix.com logged 8.4 million visits in April, compared with 19.7 million at Walmart.com, according to comScore. About 9% of Wal-Mart visitors also visited Netflix. “It’s noteworthy that 90% of Wal-Mart visitors don’t visit Netflix,” Hess says.

Netflix’s agreement with Wal-Mart is non-exclusive, leaving the possibility that Netflix could partner with Amazon.com or others, Barry McCarthy, Netflix’s chief financial officer, told the JP Morgan 33rd Annual Technology Conference the day the deal was announced.

Observers note that Wal-Mart does not have the DVD distribution infrastructure-or the appetite to build it-that has been a defining trait of Netflix’s success. Hess also notes that Wal-Mart’s cross-channel focus did not benefit from online DVD rentals. “Online video rentals do very little to get consumers into a Wal-Mart store,” he says.

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