Netflix takes over Wal-Mart’s online DVD rentals

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

Thursday’s David-defeats-Goliath announcement boosted Netflix’s shares, which gained 63 cents, or 4.1 percent, 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-based Netflix at their current price for the next year. Those who don’t 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 didn’t disclose how many customers Netflix will inherit nor the financial terms of their partnership. About 70 percent 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 Inc. — the other big player in online DVD rentals — 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.