Wal-Mart Stores Inc. said it was closing its online DVD rental business and would direct its customers to Netflix Inc., offering the struggling company a lifeline.
The Wal-Mart partnership gives Netflix exposure to 500 million visitors who visit the walmart.com site every year.
Shares of Netflix, which pioneered online rentals, jumped as much as 24 per cent and touched their highest level since August, before rival Blockbuster Inc. launched a competing online service.
The Wal-Mart-Netflix deal shrinks the competitive landscape for the nascent online DVD rental industry to just two players.
Netflix and Blockbuster have been locked in an expensive price war since last fall, when Blockbuster launched its online service and twice undercut Netflix's subscription price.
"This is big," Fulcrum Global Partners analyst Stacey Widlitz said. "That's pretty significant for (Netflix). I would say they are gaining back some traction in the fight with Blockbuster."
Under the agreement, Wal-Mart, the world's largest retailer, will offer its online customers the opportunity to sign up with Netflix at their current monthly subscription price of $12.97 for a year, and Netflix will promote Wal-Mart DVD sales to its three million subscribers.
Blockbuster struck back by offering Netflix and Walmart. com customers switching to Blockbuster's online rental service two free months of rentals plus a free retail DVD of their choice.
Customers changing to Blockbuster Online would be able to subscribe for the next year at their current walmart.com or Netflix price.
Netflix charges $17.99 per month for renters to keep three DVDs at a time. Blockbuster charges $14.99 for the same thing but this week began testing a fee of $17.99. Walmart.com's customers have paid $12.97 to take out two DVDs at a time.
In a statement, Blockbuster Chief Executive John Antioco reiterated his commitment to aggressively growing the online business to catch up with Netflix.
Last week, Antioco was temporarily unseated as board chairman in a proxy fight waged by dissident shareholders unhappy, in part, with heavy spending on the online service.
Walmart.com Chief Executive John Fleming said Wal-Mart hopes to refocus on what it does best - DVD sales - by spinning off the online rental service to Netflix.
"Selling movies has a great cross-channel integration with (Wal-Mart), but the rental business was less so," he told Reuters in a phone interview.
Fleming and Netflix Chief Executive Reed Hastings said they began talking about a possible deal months ago, after Hastings did some Christmas shopping on Wal-Mart's Web site and noticed the low DVD prices.
The companies would not release the terms of the agreement, but said it was a nonexclusive, multiyear pact that would allow Netflix to form a similar partnership with giant online retailer Amazon.com Inc.
Netflix Chief Financial Officer Barry McCarthy on Thursday told an analysts' conference that the company "would be interested" in such an arrangement if a deal could be struck.
Hastings said it was too early to tell how many of Wal-Mart's online subscribers would make the jump to Netflix. Analysts have estimated walmart.com's DVD rental subscriber base at between 50,000 and 300,000.
Wal-Mart, which launched its online DVD rental service in late 2002 but never promoted it heavily, did not disclose its number of subscribers.
Netflix said in a statement that the addition of Wal-Mart's subscribers would not "materially impact" its own subscriber growth, and it would not revise its forecasts. Netflix has said it expects to reach four million subscribers by the end of 2005.
The company lost money in the first quarter and has predicted losses for the second quarter and full year, blaming spending to stave off competition from Blockbuster.
Blockbuster has reported having more than 750,000 online rental subscribers and expects to grow to two million by the end of the first quarter of 2006.
Fulcrum's Widlitz said the agreement between Netflix and Wal-Mart probably would not deter online retail giant Amazon, which launched an online DVD rental service in Britain last year, from entering the US market - and possibly setting up a partnership with Blockbuster.
"I don't think the battle is over here," she said. "To team up with Amazon is probably as powerful on the web as teaming up with Wal-Mart."
Shares of Netflix rose as much as 25 per cent in early trade but fell back after Lehman Bros. analyst Anthony DiClemente advised clients to sell.
"The stars are aligning on the good news for Netflix. The question is: How much is the stock worth?" DiClemente told Reuters. "I don't see it going back to $25."
Shares of Netflix were up 91 cents or six per cent at $16.41 in late afternoon trade on Nasdaq, after earlier rising as high as $19.27.
Shares of Blockbuster were down seven cents to $9.71 on the New York Stock Exchange and Wal-Mart shares were down seven cents at $47.51, also on the NYSE.