WalMart is getting out of the rental DVD business and turning its customers over to Netflix.

WalMart only made a half-hearted effort to compete over the last two years, developing a hundred thousand customers who drew from a comparatively small selection and got slow service from a single distribution center. Netflix has five million customers, a deep selection of movies, and dozens of distribution warehouses. WalMart has the ability to crush competition in any field, but in this case apparently felt it wasn’t worth the effort.

WalMart is delivering its customers to Netflix and promoting Netflix in its stores and on its web site in exchange for links on Netflix pages to purchase DVDs from WalMart.

Blockbuster is pouring money into the mail-order rental DVD market, also aiming at Netflix. Today’s announcement is a tremendous psychological boost for Netflix. Blockbuster has deep pockets but so far has not developed any compelling advantage over Netflix in any category – price, selection, speed, or anything else. Amazon started a DVD rental business in the UK and has been mulling over the US market; the Netflix/WalMart partnership might stop Amazon from moving forward in the US.

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