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Suit Alleges ‘Conspiracy’ Between Wal-Mart and Netflix

By Chris Tribbey | Posted: 07 Jan 2009

The 2005 agreement in which Wal-Mart turned over its online DVD rental business to Netflix was the result of a “conspiracy,” one that aimed to build a monopoly for online DVD rentals, a lawsuit against the companies alleges.

The suit alleges the companies’ agreement had “the purpose and effect of monopolizing and unreasonably restraining trade in at least the online DVD rental market.”

“[The] conspiracy enabled Netflix to charge its customers higher subscription prices for the rental of DVDs than it otherwise would have,” the suit reads.

Six Netflix subscribers living across the country filed the suit Jan. 2 in U.S. District Court in Northern California. The suit, which does not specify the amount of damages sought, calls for class-action status and a jury trial.

“We have received and are reviewing the suit and will respond to the court at the appropriate time,” a Wal-Mart spokeswoman said.

Netflix declined to comment on the suit.

The suit points to a January 2005 dinner between Netflix CEO Reed Hastings and John Fleming, then-CEO of Walmart.com, where they allegedly discussed both the online and brick-and-mortar DVD business. “According to Hastings, having ‘noticed how low Wal-Mart’s prices [for DVDs] were,’ he ‘called the CEO [of Walmart.com] in January and asked if he could have dinner,’” the suit reads.

In May of that year, Wal-Mart agreed to shutter its online DVD rental service by June, giving its customers a chance to join Netflix at the same subscription price Wal-Mart charged for a year. In return, Netflix agreed to promote Wal-Mart as the place to purchase new DVDs.

According to the suit, Wal-Mart accounts for 40% of all new DVDs sold, mostly online, and the agreement between it and Netflix was contingent on Netflix agreeing not to engage in the sellthrough business. The suit says the agreement allowed Netflix to gain its approximate 75% market share and charge subscription fees that were at “artificially high and supracompetitive levels,” thanks to having only Blockbuster with which to compete.

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