Netflix's Rare Victory


It's a good thing that Lady Justice is wearing a blindfold.

Netflix (NAS: NFLX) has come up big in the courtroom, probably one of the few places where the past few months of incompetent business moves aren't necessarily a disadvantage.

A federal judge has thrown out a class action lawsuit that accuses Netflix of colluding with Wal-Mart (NYS: WMT) to carve up the DVD market in 2004. The complaint alleges that Wal-Mart agreed to bow out of the DVD rental market if Netflix would abandon plans to sell DVDs.

It did seem to play out that way. Wal-Mart handed over its fledgling DVD rentals by mail business to Netflix, while Netflix never did sell new optical discs and even discontinued it practice of selling excess inventory to its subscribers.

However, this deal was laughable from the start. Wal-Mart was flopping in DVD rentals anyway. The discount department store chain was reportedly down to about 100,000 members when it pulled out the white flag, so it was never going to be a threat to Netflix or what is now Dish Network's (NAS: DISH) Blockbuster.

Over on the retail front, did anyone really think that Netflix would be a major player on the DVD sale front? Blockbuster with its in-store resale business and (NAS: AMZN) were -- and are -- Wal-Mart's biggest challenges.

Besides, movie studios have been bellyaching about the accessibility of cheap rentals -- either physical in-store rentals through Coinstar's (NAS: CSTR) Redbox or the attractiveness of Netflix's mail-order smorgasbord -- as a deterrent to sales. Why would Wal-Mart arm a competitor with the weaponry to eat into its retail business?

There was no collusion, at least not to the point of raising antitrust concerns. It was silly, quite frankly, and the only reason that folks began to take this seriously is because Wal-Mart decided to settle on the suit. Rather than deal with lofty legal tabs and dragging its reputation as a global bully through the mud again, the world's largest retailer figured that settling would be the easiest way to make this go away.

Kudos to Netflix for sticking it out, especially since many figured that it was silly for the company to risk hefty damages if it were to come up short here.

If you want to see what happens next, consider addingNetflixto My Watchlist.

At the time thisarticle was published The Motley Fool owns shares of Wal-Mart Stores. Motley Fool newsletter services have recommended buying shares of Coinstar, Netflix, Wal-Mart Stores, and Motley Fool newsletter services have recommended creating a diagonal call position in Wal-Mart Stores. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story except for Netflix. Rick is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

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