It's official. There's a good deal of overlap between Netflix (NASDAQ:NFLX) subscribers and diehard gamers.

The DVD rental giant and Microsoft (NASDAQ:MSFT) issued a press release this morning praising the initial success of Netflix's digital streaming through Xbox 360 systems.

More than a million Xbox LIVE Gold members have downloaded and activated the Netflix application, allowing Netflix subscribers to stream a growing library of 12,000 titles at no additional cost through their Xbox consoles.

Since launching the application in November, Xbox LIVE users have watched 1.5 billion minutes of movies and television shows from the Netflix streaming catalog.

Wow, right?

Netflix closed out the year with nearly 9.4 million subscribers. In other words, more than 10% of the Netflix subscriber base jumped on this perk. However, they couldn't have done this unless they were diehard gamers, willing to pay Microsoft roughly $50 a year for LIVE Gold memberships.

Put another way, at least a million Netflix subscribers have the discretionary income to burn in supporting two different leisure subscriptions. Why isn't Netflix reaching out to them for a third? Why isn't Netflix renting video games?

I ask this question a lot. I even repeated it earlier this week, when niche leader GameFly made a small e-content acquisition.

More end game than endgame
I know the pitfalls.

  • Video games are more expensive than DVDs.
  • There's a limited number of titles in actual demand at any moment, and Netflix can't afford to load up on new releases that will be collecting dust too quickly.
  • Several sporting franchises -- like Electronic Arts (NASDAQ:ERTS) with its Madden football series -- have a shelf life of less than a year before the next annual installment renders the older copy obsolete.

Another reason to sidestep the question altogether is that Netflix is clearly growing just fine on its own. It's easy to imagine Netflix mailers being used for everything from computer software to video games to audio books on CD, but straying from its flagship film product would blur the brand.

However, there also comes a time when a company needs to cash in on its core competencies and branch out into logical extensions. Why do you think retail video chains like Blockbuster (NYSE:BBI) rent games? Why do you think two of the three leading video game consoles play DVDs?

Couch potatoes may not necessarily be computer junkies or audio book-seeking commuters, but you will usually find a video game controller within reach of a television's remote control.

Getting in the game, slowly
My suggestion in the past has been for Netflix to work exclusively with Microsoft when it comes to game rentals. It would give Netflix the leeway to negotiate attractive product acquisition rates as part of a symbiotic relationship. 

After all, you should know that Netflix CEO Reed Hastings sits on the Microsoft board. It is not a coincidence that while Netflix has reached out to companies like TiVo (NASDAQ:TIVO) and Blu-ray players like LG and Samsung to offer the same streaming functionality offered to Xbox LIVE members, it has skirted Sony (NYSE:SNE) completely.  

Is this a problem? It could be, since Sony is also a major movie studio. Tensions simmered back in November, when Sony withdrew access to some of its films from the Netflix streaming catalog through Xbox LIVE.

One can also point out how Microsoft is trying to kill the physical distribution of games. This year will bring the first of two Take-Two Interactive (NASDAQ:TTWO) episodic installments for Grand Theft Auto IV owners. Microsoft is paying $50 million for the exclusive episodes that will be sold only through the Xbox LIVE marketplace.

So, why would Netflix even bother to have some skin in a game that is as doomed to obsolescence as its DVD stronghold? Let's go over a few positives:

  • Folks who rent games are likely to hold on to them longer than flicks. That's a drag on inventory control, but it's great when Netflix is subsidizing the two-way shipping costs.
  • Netflix already reaches 9.4 million homes who appreciate the value proposition of renting entertainment using a smorgasbord model.
  • Just as Netflix has become a force in the digital delivery of celluloid, it should be able to make a similar migration if video games go completely digital.
  • Every quarter that it dismisses the genre, it gives competitors a way to attack the public with a more complete entertainment rental product. As a market leader, the last thing Netflix needs is to be chasing someone else.

So, congratulations to both Microsoft and Netflix for realizing that the two of you go together as well as peanut butter and chocolate. The next step is so obvious that even a rhesus monkey with a Reese's can figure it out.

Other detailed walkthroughs:

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.