Get in the Game, Netflix!

Matt Thurmond's plea to Netflix (Nasdaq: NFLX) yesterday, suggesting that it stick to its DVD renting stronghold and forgo the video game rental market, makes sense. Video games are costly. Video games age quickly. In short, it's a margin-munching recipe for disaster.

So? What are you waiting for, Netflix? Do it!

The problem isn't so much that smaller outfits are already doing it. The real rub here is that if Blockbuster (NYSE: BBI), Wal-Mart (NYSE: WMT), or even Amazon (Nasdaq: AMZN) beats Netflix to the punch, how will Netflix compete?

In a sense, Blockbuster is already doing it because its online rental service includes a pair of in-store freebie rentals that can be used on video games as well as movies. Netflix can argue that its wide distribution network, efficient inventory control, and proven user interface are enough to allow it to charge a few bucks more a month than its competitors. As a satisfied Netflix subscriber who has kicked the tires of the two major rival services, I would tend to agree. Yet running a premium-priced online disc renting service implies superior features. Even if loaning out video games proves to be a zero-sum game, isn't it worth it if it keeps subscribers from defecting if a family welcomes the convenience of renting a romantic comedy for the adults to go with an appropriate game for the kids?

Matt argues that video games age quickly. I know it. Over the weekend I saw used copies of Madden 2003 marked down to $2.99 at a local EB Games. That's the problem with the Electronic Arts (Nasdaq: ERTS) EA Sports franchises with annual installments. They have the shelf life of a carnival goldfish. Yet non-sports titles tend to hold up much better. According to Amazon, the original Halo is the sixth best-selling Xbox video game right now despite being released four years ago. Three years later, Kingdom Hearts is still a prominent seller for the PS2. Good luck finding a DVD with that kind of Pink Floyd longevity. That's why I think those fears are overblown.   

Matt also argues that video games are costly. VHS tapes used to be costly to the video rental specialists until Blockbuster ushered in revenue-sharing agreements. What's to stop video game publishers from striking similar deals with Netflix? Maybe it won't be EA. Maybe it won't be the Grand Theft Auto mavens at Take-Two Interactive (Nasdaq: TTWO). Yet, somewhere out there, there's a software company or two that would pay dearly to be exposed to Netflix and its impressive user base of 2.5 million early adopters with disposable income to spare.

Just as Netflix achieves more attractive revenue-sharing pacts with indie studios -- and in turn features them prominently -- a little ingenuity is all it takes to make this work. Perhaps it's launching a mechanism that moves dated inventory by allowing it to sell loaned out titles at a graded scale so Netflix comes out ahead while the subscriber can score a bargain on a game worth keeping (while promoting the rental of older titles to see how low the ownership tables will go). Perhaps it's charging video game publishers that wish to include free preview discs with the rentals.

If video games are the elixir that will allow Netflix to grow its subscriber base beyond film buffs by aggressively appealing to college dorms, fence-straddling families, and pediatrician waiting rooms, play on, Netflix. You didn't come this far -- breaking all the rules -- only to lose market share because you fell behind the times. 

Netflix, Amazon, and Electronic Arts are all Motley Fool Stock Advisor recommendations.

Should Netflix introduce video games? Will the higher costs be offset by the longer holding periods? Will it help nurture subscriber loyalty? All this and more -- in the Netflix discussion board. Only on Fool.com.

Longtime Fool contributor Rick Munarriz has been a Netflix subscriber -- and investor -- since 2002. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.