Wal-Mart Yields to Netflix on Rent
published: cw 21, 2005 in Mergers & acquisitionsWal-Mart Stores Inc. called it a wrap Thursday for its fledgling online movie rental business and turned the operation over to industry leader Netflix Inc.
The move represents a rare setback for the nation’s largest retailer, which had only 1% of the online DVD market and never made significant inroads into the business. Wal-Mart instead will continue focusing on selling DVDs at cut-rate prices, a business it dominates with one-third of the market and where the industry’s biggest growth is occurring.
Both companies get something out of their partnership. Netflix will link its movie buffs to the DVD sales area on Wal-Mart’s website, while Netflix gets access to a massive pool of potential subscribers in Wal-Mart customers.
Online renting is growing as customers are enticed by the broad selection and convenience of having DVDs delivered to their homes via the mail with no late fees to worry about. Revenue from video rentals ordered on the Internet is expected to reach $1.3 billion by 2006, up from $866 million this year, according to Carmel, Calif.-based Adams Media Research. By contrast, in-store video rentals are expected to fall 6% this year, to $7.7 billion. Despite its growing popularity, the online rental business has been showing losses amid price cuts and increased promotional spending. In addition, mass merchandisers such as Wal-Mart and Best Buy Inc. aggressively use low-priced DVDs as promotional tools to lure customers into stores, prompting many consumers to buy movies in lieu of renting them.
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