You Blew It, Netflix

Well played, Blockbuster (NYSE: BBI  ) .

The DVD retailer will begin offering video game rentals by mail this year. It will launch a pilot program with select Total Access subscribers during the second quarter, with plans to roll it out nationally later this year.

I've been bellyaching over Netflix's (Nasdaq: NFLX  ) refusal to throw its hat into the GameFly ring for years.

No one needs to tell me that renting video games is an iffy business. Games cost way more than DVDs. They also age quicker. A company can rent a copy of The Godfather on DVD for as long as the platform is relevant. You can't squeeze more than a few months of use out of a sports franchise title with annual installments.

So what? Isn't that simply a matter of pricing a service accordingly? Besides, GameStop's (NYSE: GME  ) doing just fine selling used games and gear at its stores. Obviously there is a vibrant resale market for games.

How could Netflix have blown this golden opportunity to beat Blockbuster? Both companies have the distribution centers to provide overnight delivery throughout most of the country. Even if delivering games is never much of a profit center, offering it alone could be a retention tool, like the Web streaming it provides at no additional cost to subscribers.

Microsoft (Nasdaq: MSFT  ) proved last week that there is a lot of overlap between Netflix subscribers and die-hard gamers. It announced that a million Xbox LIVE users had streamed a collective 1.5 billion minutes since Netflix made the service available to Xbox LIVE Gold members three months ago. That's a lot of people paying to subscribe to both Netflix and Microsoft. Will they stay true to Netflix when Blockbuster is mailing out games? Even if the implication is that they'll stick with Netflix because of the Web streaming through their consoles, it still opens up the opportunities for PlayStation 3, Wii, and non-Gold Xbox 360 owners.

Netflix is usually one step ahead of the competition. It slashed rates when it feared that Amazon.com (Nasdaq: AMZN  ) would enter the DVD rental market. It slashed rates again when Blockbuster priced its Total Access service aggressively, knowing it could hold its breath underwater longer. It brokered a deal with Wal-Mart (NYSE: WMT  ) to hand over its DVD rental subscribers when it seemed as if the discount department store was wobbly.

So surely it saw this coming. Ignoring the threat, apparently, is dumb. Dismissing the threat is even dumber.

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Longtime Fool contributor Rick Munarriz loves playing video games but doesn't own shares in any of the companies mentioned in this story, save for Netflix. He 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 February 11, 2009, at 2:32 PM, rbstern wrote:

    Hailing a new BBI decision as a Netflix error is ridiculous. Netflix has routinely demonstrated that it knows this business much better than BBI.

    Whose track record in the mail order DVD rental business do you like better? Who has demonstrated a superior strategic approach to the market?

    Here we are, in a bad economy, and Netflix is trading near an all time high, with excellent cash flow and profits, while BBI continues to thrash around looking for ways not to drown.

    And Netflix blew it, you say?

    Maybe you can ghost write for Herb Greenberg, who pronounced Netflix dead more times than an undertaker looking to drum up new business at a retirement home.

  • Report this Comment On February 11, 2009, at 2:36 PM, mrgeronimo wrote:

    It's not over until it's over. NetFlix can step into the game-rental arena at any time. Continued prompting might help, but I'm sure they have fairly assessed the pros and cons and will make the appropriate move for their organization.

  • Report this Comment On February 11, 2009, at 2:44 PM, DavisFreeberg wrote:

    We'll have to see how they end up pricing it, but I think this is a smart move by Blockbuster. Even if they can just make breakeven on the video games, it finally gives them a competitive advantage. When Netflix didn't have to worry about a hybrid DVD/video game service competing with them, it made sense to ignore this market, now I'm not so sure. If it does catch on with consumers, I think that there is a better then 50% chance that Netflix will either launch their own, buy someone like Gamefly or create a partnership with someone. Personally, I'd like to see them bundle a $25 per month DVD/Video game plan with Gamestop and then earn a couple bucks as a referral fee to have them run the video game portion of the program.

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