Analysis: How Netflix Could Shake Up The Game Rental Business

[Gamasutra editor-at-large Chris Morris looks at how Netflix's recent decision to add video games to its rent-by-mail service could pose a threat to competitor GameFly and shake up the video game rental market significantly.] Maybe it's a good thing that GameFly has been unable to get its act together and launch that IPO it filed for last February - because if it had, its stock would surely be taking a prison yard beating today. Netflix has made some baffling moves in the last couple of months, and Sunday's announcement that it would be spinning its DVD-by-mail service into a separate division certainly qualifies as one of them. But the addition of video games to its offerings could be just what the business needs to prop that service up for a few more years. DVDs are a withering business, dying a slow death by 1,000 cuts, but they're still the bread and butter of Netflix financially (and likely to remain so for some time). The addition of games to the service could be just the salve necessary to convince Netflix fence sitters to hang on to their DVD subscription, but it's an action that will likely have major repercussions on existing players in the field. Among the companies most obviously impacted by the announcement is GameFly. The leading games-by-mail site has been pretty quiet lately, but it's going to need to change that strategy fast. The IPO? It has become the Wall Street equivalent of Duke Nukem Forever. Several major companies have filed and gone public since GameFly first declared its intention with the SEC, leading most market watchers to assume the IPO will be withdrawn at some point. (Market fluctuations are a valid reason to delay an offering, but that's not an excuse you can use for 18 months.) That's problematic, because marketing is about to become critical to the company. And the money an IPO would have raised could have come in handy for that. Netflix – or, rather, Qwikster - has essentially declared war on game rental companies and has a deep warchest that will help it ensure people know about its Xbox 360, PS3 and Wii offerings. The advantage GameFly likely has, for now, is the depth and breadth of its catalog. Netflix (and for simplicity's sake, can we agree to keep using that company name for now instead of the astonishingly ill-conceived Qwikster?) hasn't detailed how many games it will offer or how deep its catalog is. Regardless of the size of that collection at launch, though, expect it to grow quickly. While Netflix has made some PR missteps of late, it's smartly launching game rentals right as the industry begins churning out a slew of in-demand, high quality titles. The disadvantages greatly outweigh the advantages for GameFly, however. Netflix implied that adding game rentals to your queue will only cost a couple of extra dollars per month. $12 for two game rentals or $15 for two games or movies isn't a real headscratcher for most folks – especially given Netflix's dominance in shipping/turnover times. GameFly has been investing heavily in content sites, including MobyGames and Shacknews. The buzz has always been that they were hoping to launch a game streaming service of their own, but OnLive beat them to market with that and is building a good niche for itself. If GameFly can't quickly find a way to distinguish itself from Netflix, the questions about its longevity are going to begin swirling quickly. (Note: GameFly's DS and PSP rental options don't count as a distinguishing factor. While they're nice additions, they're not game changers, given the rise of other mobile gaming options.) Certainly, GameFly is not the only company that will be impacted by Netflix's entry in the market. Redbox, after a two-year trial, began offering game rentals nationwide in June, noting it was a key component of the company's future growth. "Second to movies, renting and playing games is a huge part of the entertainment pie in this country," Mitch Lowe, president of Redbox, told me at the time. Redbox may have had a window to steal customers when Netflix hiked prices, but that window may be shorter than many people expected. OnLive, meanwhile, operates in a different part of the game rental universe, but it's impossible to think it will escape without feeling some heat as well. Netflix's video game rental announcement comprised just 63 words of Sunday's 1,000+-word blog statement, but those few words have the potential to unleash significant chaos on the game industry. And when you consider that the company writing those words has already been incredibly disruptive to the film and TV industries, the potential for further disruption is hard to ignore.