Xbox Marks the Spot for Netflix

Are diehard gamers ready to stream some Netflix (Nasdaq: NFLX  ) movies?

If so, they probably can't wait for tomorrow, when Microsoft (Nasdaq: MSFT  ) rolls out its New Xbox Experience platform. The update will allow Xbox LIVE Gold subscribers to access their existing Netflix subscriptions on their Xbox consoles. Offered at no additional charge to active subscribers of both services, gamers will now be able to watch any of 12,000 online streaming titles.

It seems like a long time since the deal was announced back in July, and it remains to be seen who's getting the better end of the deal. Will Netflix gain more new accounts from the Xbox minions? Will more existing Netflix members buy Xbox 360s over other consoles during the holidays?

Netflix and Microsoft hope that the enhanced feature will help keep churn in check. After all, this is in an investment -- at a cost -- in retention. Netflix incurs digital-delivery costs and pays studio royalties.

This is a calculated risk for both companies. There are potentially greater opportunity costs at Microsoft, since free streaming undercuts the Xbox's efforts to sell digitally downloaded movies and television shows. The lure of Netflix might lure more gamers to the Xbox platform, but Microsoft  has to realize that someone who spends the next two hours streaming a movie won't be spending that time buying Xbox Live games through its console interface.

With this deal, Netflix will set itself apart from the likes of Blockbuster (NYSE: BBI  ) , and Microsoft will be the exclusive video game console for Netflix streaming. Now that Netflix CEO Reed Hastings sits on the Microsoft board, it's highly unlikely that Netflix will ever strike similar deals with Sony (NYSE: SNE  ) or Nintendo (OTC BB: NTDOY.PK).

Microsoft will continue to partner with other filmed-entertainment companies. Netflix, meanwhile, has been busy shaking hands with companies such as Roku, LG, and Samsung over products that deliver its flicks -- currently an eighth of the company's entire catalog -- into subscribers' television sets.

However, the Microsoft-Netflix deal is the biggest one of all. Netflix and Xbox LIVE are about to become even larger parts of the couch-potato culture. Stream on.

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


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  • Report this Comment On November 19, 2008, at 7:01 AM, gspet wrote:

    I want this combination to work for me, but it doesn't. My gaming is very limited so I have no interest in XBox Live. I have the original XBox and have been waiting for a compelling reason to get a 360. (Halo 3 almost does it, but not quite.) Blu-ray would do it, but Microsoft isn't interested. I'm a Netflix subscriber, but I have a pre-Intel Mac so I can't stream to my computer. Give me Netflix streaming on a 360 (at no additional cost) and I'll buy one. Netflix has nothing to gain from me, but Microsoft does. Needless to say, once I buy the 360 I'll start buying more games.

  • Report this Comment On November 19, 2008, at 8:24 PM, dojodan444 wrote:

    It's likely a deal is in the works for PS3 and Blockbuster, utilizing a similar option as Netflix has brokered with X-Box. You can be sure that whatever move Netflix makes, Blockbuster will attempt to counter it. Netflix offers a free one week trial, so Blockbuster is offering two free weeks.

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