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.

For more Foolishness:

• I have written about how Netflix belongs in this market many, many, many times.
• I can't be the only one asking why Netflix has stayed away.
• Want to play? Here's Your Shot to Score Big.