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Judge Tosses Netflix, Walmart Antitrust Lawsuit

24 Nov, 2011 By: Erik Gruenwedel

Decision has no impact on separate $27 million court settlement with Walmart

Thanksgiving came early to Netflix after a federal judge in San Francisco threw out a class-action lawsuit that alleged Netflix and Walmart in 2004 conspired to separately control the nascent by-mail DVD rental and burgeoning DVD sellthrough markets.

In her Nov. 22 ruling, U.S. District judge Phyllis Hamilton said Walmart’s online market share of the by-mail DVD rental market was too small (1.5% of rental market, according to the ruling) to be considered an impact on consumer rental options at the time.

“The court concludes that no reasonable juror could believe that Netflix would have lowered its [three-disc rental plan] to $15.99 [per month] in response to continued competition from Walmart, whose [three-disc plan] was set at $17.49 – particularly when those facts demonstrate that Netflix chose not to lower its price in the face of Blockbuster’s $14.99 price cut, despite the fact that Blockbuster had a higher market share than Walmart,” Hamilton wrote.

Indeed, Blockbuster, which had just launched its by-mail/in-store Total Access program, controlled 17% of the rental market. And in October 2004, Amazon was rumored to be entering the disc rental business, according to the ruling.

At the time, Walmart’s online disc rental business had 60,000 subscribers compared to 2 million for Netflix and 400,000 for Blockbuster, according to court documents.

On Jan. 9, 2009, lead plaintiff Andrea Resnick filed in U.S. District Court in Oakland, Calif., alleging that the retail behemoth and Netflix in 2005 entered into an illegal “market allocation” agreement whereby Walmart agreed to exit the by-mail DVD rental business (forwarding its subscriber list to Netflix) and Netflix agreed not to sell new-release DVDs.

With about 65 similar complaints filed, the case was given class-action status.

According to the ruling, Netflix CEO Reed Hastings and then Walmart CEO John Fleming indeed entered into a “promotional agreement” agreement whereby Netflix agreed to pay Walmart 10% of monthly fees for transitioned subscribers, in addition to a $36 fee for each sub. Netflix in turn agreed to promote online Walmart.com’s DVD sellthrough business.

The pact between Netflix and Walmart occurred at a time when DVD sellthrough of new-release movies and TV DVDs dominated home entertainment — driven by Walmart and upstart Walmart.com. The plaintiffs alleged that due to this pact, Netflix was able to charge more for its dominant disc rental service (streaming did not launch until 2008) than it would have without the agreement, according to the complaint.

Blockbuster’s by-mail platform, Total Access, didn’t launch until Nov. 2, 2006 — with Jessica Simpson as its official second subscriber behind CEO John Antioco. Hollywood Video and Movie Gallery did not have by-mail subscription services.

The ruling has no impact on a separate $27 million settlement (minus 25% lawyers’ fees) with Walmart, which admitted to no wrongdoing in exchange for ceasing litigation. While Walmart’s settlement would now appear premature, some industry observers contend the retail behemoth did so in order to access confidential Netflix subscriber data as it expands its Vudu transactional video-on-demand service.


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