Too Little, Too Late for Blockbuster

Blockbuster (OTC BB: BLOKA.PK) finally got into the game that it should have gotten into years ago.

The teetering media rental chain announced that it would begin offering video games by mail nationally yesterday -- a move that I have been advocating for five years.

What took it so long? It has been renting video games through its bricks-and-mortar locations for ages. Tacking on console software to its mail-based subscriptions was a logical step.

This could have been a real differentiator in its battle against Netflix (Nasdaq: NFLX  ) -- when Netflix was all about the red mailers. It could have owned this space, instead of letting GameFly win over the die-hard gamers.

Right now, it's just a sad realization as Blockbuster's life flashes before its eyes.

Going for it on fourth and long
It's poetic that Blockbuster should announce its entry into this niche yesterday, just as Electronic Arts (Nasdaq: ERTS  ) was rolling out Madden 11.

EA's iconic football franchise has often been used as a cautionary tale for video game rentals. Since the annual updates become obsolete by the time the next installment rolls around, the limited shelf life makes it a bad bet for the rental industry.

This isn't like stocking up on copies of Avatar or Inception that rental chains know will have legs for years -- if not decades. Video games cost more than DVDs, and they age quicker. There may still be demand for the original Halo or Grand Theft Auto III, but no one cared for Madden 10 by the time last year's NFL season came to a close.

GameFly's solution is to charge more. The entry-level plan that allows unlimited rentals with one disc out at a time will set players back $15.95 a month. Netflix and Blockbuster are at $8.99 for the similar DVD plan -- and that includes unlimited streaming for Netflix subscribers.

In a gutsy move, Blockbuster is offering games at no additional cost.

Get nervous, GameFly -- or at least chow down on those razor sharp fingernails until Blockbuster buckles.

Playing to win the game
Blockbuster's desperate lob -- a Hail Mary, if you will -- is going to turn heads. Unfortunately, it may not be as many heads as it hopes.

When it filed its S-1 with the Securities and Exchange Commission in an unfulfilled push to go public last year, GameFly had just 334,000 subscribers. Even if Blockbuster is able to woo a chunk of those gamers, it's a far cry from the 15 million couch potatoes on Netflix's rolls.

Thankfully for Blockbuster, Netflix subscribers also like to fire up their consoles. When Netflix began to offer streaming through Microsoft's (Nasdaq: MSFT  ) Xbox 360, a million members had signed up less than three months later.

Have you noticed how the video game industry has taken a dive since that moment? Some will argue that sales of Activision Blizzard's (Nasdaq: ATVI  ) Guitar Hero franchise peaked -- and with it, sales of costly plastic instrument controllers. Others argue that it's the success of casual and social games through smartphone apps and Facebook that have gobbled up passive gamers.

However, I think a fair argument can be made that as soon as Netflix began streaming through Xbox, Wii, and Sony (NYSE: SNE  ) PS3 systems that consoles became a multimedia appliance. As more time is spent watch optical discs or streaming flicks, there is less time to lean on gaming devices to actually play games.

If so, Blockbuster may have a winner here by offering the best of both worlds.

Unfortunately, it is still too late.

Playing overtime in a game that was never even close
Even by its own standards, Blockbuster is late. It announced a pilot program in February -- of last year -- with plans to go national before the end of 2009.

It obviously didn't happen.

Blockbuster's not the only chump. Where is GameStop (NYSE: GME  ) in all of this? The retailer is as good as anybody in managing and profiting from used game trade-ins. How come it didn't belly up to the subscription bar? The market has beaten the shares down to a ridiculously low valuation over concerns of its current model. A little diversification would have come in handy.

Sadly, the same reason why Netflix has all but abandoned this playing field -- investing in digital delivery over optical disc distribution centers -- is why Blockbuster is unfashionably late in game rentals by mail.

All forms of media are migrating toward digital distribution, and Blockbuster has been slow in drumming up a subscription-based streaming model for movies and games. As bandwidth costs shrink and postage rates climb -- as instant gratification continues to trump postal delivery trucks -- Blockbuster is chasing yesterday's version of tomorrow.

Given that kind of approach, it'll never get there.

Is this a smart or dumb move by Blockbuster? Share your thoughts in the comments box below.