Wal-Mart Cuts a Deal with Netflix

Wal-Mart is going out of the on-line video rental business. It has decided it can’t do it well enough to beat Netflix, and so, it will yield to the inevitable and turns its subscribers over the Netflix when their Wal-Mart membership is over. In exchange, Netflix will use its considerable pull with renters to drive subscribers to Wal-Mart’s online video sales site. It’s a significant coup for Netflix, and it’s a case of Wal-Mart making the best of a bad situation.

The Netflix model is pretty simple. Subscribers provide an online wish list of DVDs they’d like out of a library of 40,000 titles (and growing). The discs arrive in the mail, along with a return postage envelope. The price is $17.99 monthly, and viewers can keep the discs as long at it takes to watch them. Up to three discs can be rented at a time. Wal-Mart had a similar set-up but only 2 discs could go out at once, while the price was $12.99. There are other arrangements one can make, but these are the two standards.

So, if there was anything to deep pockets and cut-throat competition, Wal-Mart should have won. After all, Wal-Mart makes more in one day than Netflix brought in last year -- $506 million. However, there is the brand to consider. Netflix invented the concept, and there is a certain cyber-snob appeal to getting video from Netflix that Wal-Mart could never match without ceasing to be Wal-Mart.

The deal gives Netflix the 100,000 or so Wal-Mart subscribers, and that will help the upstart as it aims to add 1 million subscribers to its 3 million base this year. But it won’t fix the bottom line. It will lose somewhere between $5 million and $15 million this year.

The real challenges for Netflix come from Blockbuster and broadband. Blockbuster used to scoff at Netflix as a passing fad, but it has now got 1 million subscribers for its online rental service. Moreover, though, broadband delivery of video on demand makes the distribution of discs a doubtful model over the coming years. Netflix has won a major battle, but the video war continues.



© Copyright 2005 by The Kensington Review, J. Myhre, Editor. No part of this publication may be reproduced without written consent.
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