Walmart (WMT) teams up with Netflix (NFLX); Blockbuster Online (BBI) tests higher prices

Walmart (ticker: WMT) has ended its foray into the online DVD rental business and is partnering with Netflix (ticker: NFLX).  Separately, Blockbuster (ticker: BBI) is testing higher prices.  Here are some details:

Here are details from Walmart.com regarding its DVD rental business:

Great News: Wal-Mart Teams Up With Netflix
Through June 16, 2005, you can sign up with Netflix and get all the Netflix benefits for the same rate you now pay at Wal-Mart!... If you are a Wal-Mart DVD Rentals member, you can cancel your account and sign up with Netflix now. It's easy. We'll even transfer "Your DVD List."

If You Do Not Sign Up With Netflix
After June 16, 2005, Wal-Mart will discontinue its current DVD Rentals service.

If you are a Wal-Mart DVD Rentals member and do not sign up with Netflix, you can continue to use Wal-Mart DVD Rentals until 11:59 p.m. (PT), Thursday, June 16, 2005. After that time, your Wal-Mart DVD Rentals membership will end.

If you take no action, your Wal-Mart DVD Rentals membership will automatically end after June 16, 2005.

Quick comments:

On competition:
Obviously, the loss of a competitor benefits NFLX.  While it was always unclear as to how many subscribers WMT had signed up (evidently not enough), it is a massive company with enough resources to withstand a long, drawn-out price war.  This is a symbolic victory for NFLX, but a victory nonetheless.  NFLX's biggest threats still come from Blockbuster (ticker: BBI) and Amazon (ticker: AMZN), if it decides to enter the U.S. market.

On pricing:
WMT previously provided the lowest cost subscription service; reportedly 70% of its customers pay $12.97 for its 2-at-a-time plan.  BBI had twice lowered prices:  from $19.99 to $17.49, and from $17.49 to $14.99.  NFLX responded by dropping prices from $21.99 to $17.99 but resisted lowering them further.  Now, BBI is toying with raising its prices to $17.99.  The combination of WMT's exit and a BBI's price increase indicate that this war will not be won on price alone and that service really does matter.  This bodes well for NFLX, which is considered to be a superior service.  Even if BBI does raise its prices, we probably won't see any price increase from NFLX as it is focused on acquiring subscribers.

On the business model:
WMT's exit and BBI's pricing strategy indicate that this business is not sustainable below a certain price point ($18?) and that we may have seen the end of the DVD pricing wars.  Amazon could still enter the market and try to under-price everyone else, leveraging its Internet Movie Database as a way to cheaply acquire customers, but it has resisted doing so until now.  AMZN may still partner with one of these companies;  NFLX is a more logical match because of its leading position and superior distribution model, but BBI may offer more generous terms out of desperation.

On 2005 Guidance:
NFLX sent out a press release today reiterating its previous guidance.  According to the company, the WMT announcement is unlikely to have any material impact on earnings.  CFO Barry McCarthy is speaking at JP Morgan's investor conference today any may add more details.  Here is NFLX's guidance from its April 21, 2005 earnings conference call:

Q2 Guidance
Ending subscribers of 3.065 million to 3.265 million 
Revenue of $160 million to $165 million, versus consensus of $169.1 million.
GAAP net loss of $2.2 million to $7.2 million   

Full Year 2005  Guidance
Ending subscribers of 3.85 million to 4.15 million
Revenue of $660 million to $685 million, versus consensus of $704.7 million.
GAAP net loss of $5 million to $15 million

Full disclosure:  I am currently long NFLX (but not yet at break-even)