Netflix's risky bet on video games

Qwikster, the company's new DVD-by-mail branch, will offer video game rentals. Is this yet another mistake?

By TheStreet Staff Sep 19, 2011 10:19AM

the streetBy Jeanine Poggi, TheStreet


Netflix (NFLX) is entering the video game rental market, a risky bet for a company attempting to find value in its DVD-by-mail service.


The company announced Sunday that it is dividing itself into two companies -- one for its DVD-by-mail program, called Qwikster, and another for its streaming service, which will continue to operate under the Netflix banner. As part of Qwikster, subscribers will be able to rent video games for Wii, PlayStation 3 and Xbox 360.


Chief executive Reed Hastings said on Netflix's blog that this will be a video upgrade, which implies subscribers will need to pay more for the service. But Hastings didn't reveal how much more it will cost. Rival GameFly offers the service starting at $15.95 a month, while Blockbuster includes video game rentals in all of its packages, which start at $9.99 a month.


"Our experience in covering Blockbuster and GameStop (GME), and our contact with game liquidation vendors, has led us to be wary of game rentals over the years as it is a quick way to lose money," Janneu Capital Markets analyst Tony Wible wrote in a note. "We would note that Netflix management confirmed these risk factors with us years ago, which is why Netflix dismissed the market opportunity. We also believe these factors have kept GameFly from gaining more than 500,000 subscribers."


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Game rentals are inherently risky, as it is difficult to know a game's potential before it is launched. Games also have a shorter shelf life, do not have revenue-streaming agreements and are much more expensive to acquire, Wible noted.


Gamers typically want video games as soon as they are released and have little interest in older titles. By comparison, movie consumption occurs over a longer period and there are many classics that have value. For video game renters, this means finding a delicate balance between buying enough new video games to satisfy subscribers and not ending up with too many discs.


These risks have kept some rental companies from entering the gaming market. Others, like GameStop, have invented ways to cope with the inventory risk. GameStop has done this with its used video game service, which allows consumers to purchase a used game and trade back the game in their own time.


"Retailers have effectively rented the game without major exposure to game inventory risk," Wible wrote.


Wible conservatively estimates the entire U.S. video game rental market is only a $500 million revenue opportunity, which is small compared with the $3 billion used game market.

Aside from GameStop, GameFly, which offers a Netflix-like service for video games, is in the IPO pipeline, while Blockbuster also rents to gamers.

Sep 19, 2011 2:06PM
Is Netflix trying to fail at this point.  I don't see this being a good move at all for the reasons listed in the articles.  Know a few people that have tried Gamefly and discontinued it for the reasons.
Sep 19, 2011 4:15PM

Well i drop the dvd part of Netflix and i have had it for 4 years  and if the price goes up one more time i will drop it all together and look at  Blockbuster.


Sep 19, 2011 4:19PM

Netflix used to be the hip alternative to Blockbuster Video. They will now become everything they weren't before. They have gone Hollywood.


Sep 19, 2011 8:13PM
The minute Netflix announced their change in price, I called them out on their Facebook (which was then deleted) saying "Watch Netflix stocks plummet." 2 months later, their stocks dropped more than $100 a share.
Sep 20, 2011 8:32AM
After the way Netflix is treating their customers this year I would not start renting games from them. I would think once they have a large customer base they would start raising fees just like they are now.
The smartest thing Netflix can do to satisfy a pissed off customer base is to fire that egotistical, smug CEO Reed Hastings. It is his decisions that have ultimately doomed Netflix and has caused it's shares to tank, all while Mr. hastings has crudely attempted to explain his reasoning. He came off as un-attached to the real world and talking down and dumb to your customers is never a good thing.
Sep 20, 2011 9:23AM
Gamers typically want video games as soon as they are released and have little interest in older titles.

LOL @ that. If that were true then:

  • Nintendo wouldn't have added the Virtual Console onto the Wii or any of their newer products. Nor would they be selling classic games in their virtual store.
  • Sony would not be selling classic Playstation/Playstation 2 games on the PS3. Nor would the PS3 be backwards compatible with PSOne games. (It used to be backwards compatible with the PS2, but...)
  • Microsoft wouldn't be selling classic games in the XBL Store.
Long story short: Video Games are beating the Music and Movie industries' pants off. Just because old games are not being sold like hot cakes doesn't mean they need to be dismissed.

Now, Netflix adding games for an additional cost is too little too late. Gamefly has a lion share on that market. Add to it Blockbuster has it already integrated into their service and Redbox has recently added that feature. This move by Netflix is just a catch up move and another excuse to raise prices with their new service.

Sep 25, 2011 4:17PM

I can understand why Netflix is doing this but unless they plan on improving the selection they have available to stream.  There are very few big name movies available to stream unless they are very old.  The streaming service seems to be great for discovering TV shows you have never seen or needed to catch up on but it is riddled with B movies. 

Sep 20, 2011 6:52AM
Sep 19, 2011 6:03PM
Sep 20, 2011 6:43PM
Netflix is a huge rip off not only does the streaming stink but so does the dvd rental. How are u gonna raise the prices of the dvd rental when u dont even get the dvd's when there first released. As far as the streaming goes u pay the $ for a service that stinks u have a very limited selection of actually good movies, it seems as though anything i want to watch has to be ordered and then it takes forever to watch the movies once they do hit streaming by then the sad thing is that the movies is usually aready on hbo or showtime when they finally do allow u to stream it.
Sep 19, 2011 6:51PM

I am an honor graduate from a renowned business university established and located here in the USA for over 50 years. I graduated cum laude (3.79 gpa) in June 1999 - I earned a Bachelor of Science degree in Business Administration. Before that, in my earlier years, I owned my own seafood business; after that I was an Assistant Purchase Agent with an international seafood business located here in the USA; I also served with the US Air Force Reserve for 24.5 years; after graduation from the university I was hired as a consultant in the IT business during Y2K.

With communication the way it is these days,

What kind of business strategy was it that Netflix used during August 2011 - September 2011 to advertise it would charge $9.99 per month with the first month free with no mention as to how long Netflix would charge this amount to new customers nor how much it would raise the monthly cost to - while it planned to raise my (I had been a 15 month subscriber) - monthly charge from $15.86 to $19.98 per month starting September 1, 2011??   For the same identical service!!!

That is:

* 2 DVDs at a time for as many times a month that the customer could receive - through the US Postal Service - and returned the (up to) 2 DVDs to Netflix; the per cycle usually took 3 -4 days; it was a great turn-around-time.

* With unlimited number of movies, that were available through Netflix 'Watch Now' that, I could view on my home computer - called 'streaming'.

* If I had or had bought a 'streamer box' I could have watched unlimited number of movies on my TV per month, that were available through Netflix 'Watch Now' that is also called 'streaming'

I have never changed my agreement where I requested more service(s) from Netflix during 15 months of membership, but was charged more per month on 4 different occasions.

* $11.99 a month started in May 2010; went to $14.78 per month in September 2010; went to $15.86 per month in April 2011; and I received an email from Netflix that the Netflix service would increase to $19.98 on September 1, 2011.

Mr. Reed Hastings,

I cancelled my subscription with Netflix on the last day of August 2011, through the account online/internet that connection that I had with Netflix.

* Not because of the great service that I enjoyed while a subscriber to Netflix; I know it was outstanding.

* Not because I could not afford the monthly increases.

* Not because there is a better home movie (DVD or Blue Ray or Streaming) vendor out there somewhere.

Netflix was - as long as I stayed a pay per month customer - on September 1, 2011, ready to increase the cost to me $19.98 per month - an increase from $15.86 per month while it advertised the same monthly service to other customers as free for one month and $9.99 per month thereafter.

Mr Reed Hastings you may contact me through the email address that is associated with the screen name on this post.

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