October 15, 2002 7:03 AM PDT

Wal-Mart cues up a rival to Netflix

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Wal-Mart is testing a new DVD subscription-rental program, further clouding the future of Web-based mail-order service Netflix.

The Bentonville, Ark.-based retail behemoth said it plans to gather feedback from an initial group of customers and to fine-tune the service before launching it nationally next year.

The service is similar to that offered by Netflix, the pioneer of online DVD subscription rentals. Customers pay a fixed monthly fee and receive by U.S. mail a limited number of DVDs for as long as they want with no due dates, late fees or postal charges. Wal-Mart plans to charge $18.86 per month. Netflix's main plan charges $19.95, a price at which customers can rent as many movies as they want during a month but can have only three out at a given time.

Los Gatos, Calif.-based Netflix had a successful initial public offering in the spring, raising $82.5 million. But Wall Street soured on Netflix after the company announced higher-than-expected subscriber turnover.

With Wal-Mart's entry into market, investors are likely to grow even more jittery about Netflix's prospects. Wal-Mart is notorious for opening its gigantic stores in areas saturated with established retailers and still succeeding in siphoning off business by severely undercutting prices.

Blockbuster, the video-rental chain, also entered the fray this summer with a store-based, unlimited monthly subscription service.

The moves by Wal-Mart and Blockbuster to target Netflix's home turf have some analysts worried.

In a research report last week, Merrill Lynch analyst Justin Baldauf said Netflix's customer turnover, or "churn," is likely to increase to 7.2 percent from his previous estimate of 6.1 percent. He also cut his earnings estimates for the company.

"Churn is a critical operating metric for Netflix because it is the key driver of both subscriber levels and marketing expense," Baldauf said. "Churn is a function of customer satisfaction, which we believe is driven by Netflix execution in a number of key areas including in-stock levels and, to a lesser extent, delivery times."

But Netflix may be able to defend itself against Wal-Mart, said Baldauf who signed up for a 30-day trial with the retailer and found that four of five new releases were unavailable. Netflix, by contrast, had all five.

"Key risks include competition, a potential slowdown in consumer spending, and the possibility that online DVD rental is a smaller market than we project," he said.

News.com's Larry Dignan contributed to this report.

 

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