I'm not surprised that Netflix (NASDAQ:NFLX) wasn't the first dot-com heavy to announce the launch of a video game rental service. I'm just disappointed.
According to The Wall Street Journal, Overstock.com's (NASDAQ:OSTK) always-provocative CEO, Patrick Byrne, announced that the retailer was gearing up to launch a service that would allow video-game buffs to borrow software titles by mail.
The concept isn't new. Gamefly.com is the market leader, and several smaller players are giving it a go. Overstock would now be the biggest name in this niche, though its focus has always been a bit scattershot in the past. Between ventures like its auction business and Byrne's conspiracy-theory crusades, I'm always left wondering how much closer Overstock would be to profitability, had it stuck to its e-tail knitting.
Given the classy "It's all about the O" marketing campaign that has drawn upscale female shoppers to its namesake site, I'm also curious why Overstock is trying to serve a mostly young and male gaming audience. Whether this new service will ultimately prove counterproductive to its costly brand-marketing efforts is a topic for another article, though. My concern today is what this means for Netflix.
Over the past two years, I have written about how Netflix belongs in this market many, many, many times. I have asked CEO Reed Hastings about video game rentals before; he generally leans toward denying that such a service is necessary, even though Netflix has often explored the possibility.
The downside of video-game rentals has been well-publicized. Games cost more than DVDs. They are handled more, so they're more likely to get scratched or damaged. In most cases, especially with sports titles, their values depreciate quickly, becoming obsolete within a year. All of that isn't lost on me. Game rentals would have to be offered at different pricing tiers from the company's movie service; the extra costs are one reason why Gamefly is priced at a premium.
Yes, no one will want Madden 2006 when Madden 2007 comes out, but you can probably make a healthy living renting out copies of Halo, Resident Evil, or Kingdom Hearts for years. In fact, what's wrong with two tiers of service, where a discounted offering allows thrifty gamers the option to rent only older titles?
I'd figured that Amazon.com (NASDAQ:AMZN) or Blockbuster (NYSE:BBI) would be the first big name in this field. My fear was that Netflix would then lose some of its pioneer luster by being forced to mimic the competition. Instead, something worse has happened. If Overstock is able to establish itself in this market -- and then break into film rentals once it has an established base of renters -- Netflix's cold feet may have just earned it one more competitor.
Netflix has the perfect system of dozens of regional distribution centers in place. It has optimized the science of shipping and receiving small entertainment media. It has a base of more than four million subscribers who rely on it for video entertainment. Expanding into video games at a financially feasible price point is a no-brainer. Netflix fell asleep at the wheel once, letting Amazon beat it to the United Kingdom. Now it seems that the company will snooze again, allowing Overstock to capture stateside gamers.
Wake up, Netflix! It's time to play.
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Longtime Fool contributor Rick Munarriz is a Netflix shareholder and plans to stay that way. T he Fool has a disclosure policy. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.
