Goliath Falls in DVD Wars

Wal-Mart(WMT) hoisted a white flag in the online video rental war Thursday and made peace with Netflix (NFLX), igniting its former rival's stock.

On its face, the move looks like a coup for Netflix in its bid to dominate another nemesis, Blockbuster (BBI). Netflix shares vaulted $2.05, or 13.2%, to $17.55, while Blockbuster shed 1.2%.

Netflix played David to Wal-Mart's Goliath, vanquishing a company that grosses more in a day than Netflix does in a year. The online video rental game is probably its to lose now, analysts say, with its chief worry still a distant one: a possible Blockbuster-Amazon (AMZN) alliance.

With its 3 million subscribers, projected to become 4 million by the end of 2005, Netflix holds a considerable lead in the market it pioneered. Blockbuster, its most viable competitor that came late to the party, has yet to record 1 million subscribers. Meanwhile, the addition of Wal-Mart's flock will give Netflix a boost, albeit a small one.

Daniel Ernst, an analyst with Soleil-Hudson Square Research, estimated that Wal-Mart would pass along fewer than 300,000 customers, while Dennis McAlpine of McAlpine Associates puts the figure at fewer than 100,000.

"This is really a drop in the bucket in the wider context of this market, so it is a fairly immaterial event in that respect," Ernst said.

Rather than spend the money and effort to compete in online rentals, Wal-Mart appears to have concluded that the rewards didn't justify the investment. Instead, it will focus on its core business of selling DVDs. The decision to pass its online subscribers to Netflix can be viewed as a shot against its chief competitor in DVD sales, Blockbuster.

Wal-Mart's rental customers will be offered the option to become Netflix subscribers at their current Wal-Mart rate for a year, and Wal-Mart will market the Netflix service on its Web site. In turn, Netflix will advertise Wal-Mart's DVD retail offerings on its site.