Wal-Mart Sends Netflix a Trojan Horse

When Wal-Mart (NYS: WMT) bought Vudu in an attempt to horn in on Netflix's (NAS: NFLX) video-streaming business last year, Fools scoffed. Maybe Apple (NAS: AAPL) and iTunes have a chance of taking on Netflix. Maybe Amazon.com (NAS: AMZN) , with its "free streaming with Prime" offer, and its new Web-enabled Kindle tablet computer can give 'em a run for their money. But Wal-Mart? Didn't Wal-Mart try this once before and fall on its face?

Well, yes. It did. And Netflix shareholders chuckled at that bit of physical comedy -- but they're not laughing now.

We give up. You win. Now give us your customers.
Earlier this week, we learned that as part of a settled class action lawsuit against Wal-Mart, Netflix customers are going to be paid $27.5 million to resolve claims that the company injured them by requiring Netflix to refrain from selling DVDs back in 2005. Now, $27.5 million is pretty small beans to the giant retailer, and you might think this is a non-story ... except for one thing. Somehow, Wal-Mart got the judge in this case to authorize Wal-Mart's payment of its debt in the form of Wal-Mart gift cards. To do this, of course, Wal-Mart needs the contact information for Netflix's 40 million customers, so that it can mail them their $0.68 each (minus attorney's fees) in "winnings."

Netflix is reportedly not thrilled with the idea. For $0.68 plus postage, Wal-Mart will gain access to Netflix's prized customer list. That's 40 million potential Vudu customers, all known to be interested in streaming videos, and many ticked off at Netflix right now, thanks to its having just raised their monthly fees by 60%. According to the most recent data, it cost Netflix $15.09 apiece to acquire each of its customers. To make matters worse, when Wal-Mart sends out those gift cards, you can bet your sweet petunias it will encourage recipients to visit Walmart.com to spend their loot. And once there, these customers will be greeted with invitations to switch to Vudu.

Foolish takeaway
For a total cost of $1.12 per customer, Wal-Mart gets a chance to poach customers that cost Netflix 10 times as much to land in the first place. With the settlement due to go into effect in just a few months, Wal-Mart will be able to run its marketing campaign while the wounds from Netflix's price increase are still fresh.

Raise your hand if you think this "win" is good news for Netflix.

Will Wal-Mart be able to capitalize on its legal "loss?" Can Netflix find a way to scotch this settlement? Add both stocks to your Fool Watchlist, and find out.

At the time thisarticle was published Fool contributorRich Smithdoes not own (or short) shares of any company named above. The Motley Fool owns shares of Wal-Mart Stores and Apple.Motley Fool newsletter serviceshave recommended buying shares of Wal-Mart Stores, Apple, Amazon.com, and Netflix, buying puts in Netflix, creating a diagonal call position in Wal-Mart Stores, and creating a bull call spread position in Apple. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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