In what many interpret as a signal that the online DVD rental business is tougher than Wal-Mart thought, the world’s largest retailer is walking away from the arena and has agreed to funnel its subscribers to Netflix.

Others, however, see the news as a sign it wasn’t a sector worth a retailer of Wal-Mart’s size being in to begin with.

“Wal-Mart got into it because they thought it was a hot business, but now I think they realize it’s not a hot business and that they can make a lot more money selling DVDs than having people renting them out,” the founder of New York-based boutique research firm Walton Holdings, Gene Walton, said.

In return for Wal-Mart exiting the business, online DVD rental pioneer Netflix will promote Wal-Mart’s DVD movie sales on its Web site and in mailers to subscribers.

Netflix offers more than 40,000 titles from which subscribers create an online wish list of movies. For $17.99 a month, subscribers keep three titles at a time for as long as they want with no late fees. When they are through with a title, they send it back in a supplied postage paid envelope and Netflix automatically sends the next title on their list.

Netflix claims it is on track to have 4 million subscribers by year-end.

The company is in a market-share battle with Blockbuster, which reported in March that it spent $50 million in 2004 on Bockbuster.com and that it expects to spend another $70 million this year to increase its subscriber base.

Wal-Mart may have as few as 100,000 subscribers to its DVD rental service.

Netflix executives think that if they can hold off competition from Blockbuster – and potentially Amazon.com, which is testing a service in Britain – that price wars will ease and it will have a highly profitable business.

Netflix’s stock has risen steadily as billionaire Carl Icahn has waged a public battle with Mr. Antioco. Mr. Icahn is calling for Blockbuster to cut spending and raise its dividend to shareholders.

Mr. Icahn and two other dissident shareholders won seats on Blockbuster’s board this month, which Netflix’s investors take as a sign that Blockbuster may end up cutting spending on its online venture, loosening the market.

“Basically, though, I think it’s a demand issue where people would rather own the DVDs than rent them,” Mr. Walton said. The American online DVD rental market is $600 million annually, whereas the DVD sales are $16 billion.

Besides having a drastically smaller market in which to work, the online DVD rental business requires large expenditures to buy and maintain millions of DVDs and administer the membership.

Another threat to Netflix’s business model is video on demand.