June 24, 2003 11:52 AM PDT

Netflix sews up rental patent

Netflix has been granted a wide-ranging patent encompassing its online DVD rental service, a win that could pose a legal speed bump to Wal-Mart's entry into the business.

The patent, granted by the U.S. Patent & Trademark Office, covers Netflix's entire process of renting out movies and extends to music, video games and books, the Los Gatos, Calif.-based company announced Tuesday.

Netflix charges a monthly subscription fee for people to rent a specified number of movies on DVD. Subscribers choose their titles on the rental Web site, then Netflix mails the films to them. People can keep a limited number of DVDs for the length of the subscription or swap them for new titles.

The patent grant comes at a critical juncture for Netflix. Though its more than 1 million subscribers means it commands more than 90 percent of the online rental market, according to the company, rivals such as Wal-Mart and Blockbuster are circling.

Earlier this month, Wal-Mart introduced its own online movie rental service that's priced a notch lower than Netflix's. The retail giant charges $15.54 a month to rent two movies at a time, $18.76 to rent three and $21.94 to rent four at a time. Netflix charges $19.95 a month for three movies at a time.

Netflix spokeswoman Lynn Brinton pointed out the resemblance between the Bentonville, Ark-based company's DVD rental process and Netflix's own. "You can't look at (the Wal-Mart service) and not see there's a lot of similarities," she said.

However, Brinton would not say whether the patent grant foreshadows a lawsuit against Wal-Mart.

Nonetheless, having the U.S. Patent & Trademark Office on its side could be a powerful weapon for Netflix in a courtroom dispute, according to legal analysts.

"Issued patents are presumed valid until proven otherwise by clear and convincing evidence," said Alan Fisch, an intellectual-property lawyer and partner at Howrey Simon Arnold & White in Washington.

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It is interesting to note that way back in the 1980's, a New York company called Video Mailbox was using many of the same business processes as Netflix (albeit with VHS tapes rather than DVDs). Video Mailbox was in business long before Netflix filed for their patent. If you are interested in learning more about Video Mailbox, check out this fan site: http://sites.google.com/site/videomailbox/home
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