How the Netflix of Video Games Squandered Its Lead [UPDATE]

Last Updated Aug 11, 2011 4:49 PM EDT

[UPDATE: GameFly reached out and said that it purchased Direct2Drive, the second biggest computer direct download service. The move makes its strategy more realistic.]
The game rental service GameFly is jumping into downloadable games with an as-yet unnamed service for PCs and Macs scheduled to launch over the holiday season. GameFly, sometimes called the Netflix of video games, has had the whole ship-games-to-your-house model locked down since 2002. Unlike Netflix (NLFX), though, the once IPO-bound company squandered its lead -- and it's going to have a hard time catching up to its digital competition.

Going digital too late
The big problem? GameFly hasn't adjusted to the digital medium. It may have had 340,000 paying customers in 2010, but its game-store competitors have already jumped into the digital frontier:

And when it comes to selling games online, Valve's Steam service has the market cornered. Offering thousands of games for the PC and Mac, Steam has been so successful that CEO Gabe Newell says this one-time side project has delayed the company's delivery of its own games, including Half-Life 3. Steam, by the way, launched in 2002, the same year as GameFly.
Even GameFly's rent-by-mail business is under attack. Just this past year Netflix competitor Redbox started renting games, something that will affect Netflix less because it has transformed from a physical distribution company to a digital one. The threat to GameFly is much more acute.

Why sell games?
GameFly's lateness can't be helped at this point, but it's truly puzzling why its upcoming digital distribution service is selling games instead of renting them. Isn't GameFly a rental service?

This is concerning for a few reasons. First, there are few, if any digital distribution services renting to PC and Mac gamers. As Apple TV, Spotify, and other rent-to-play services become more popular, GameFly could have applied the model to computer gaming. This would have been original and innovative.

Second, by selling games, it turns the nine-year-old company into a me-too game download site. Steam is running the show right now, but juggernaut Electronic Arts (ERTS) is unrolling its own service, Origin. And EA has already said it won't make the highly-anticipated Battlefield 3 available for sale on Steam -- only on Origin. If Steam doesn't have enough pull to get EA's games, I can't imagine GameFly's digital incarnation doing it either. Maybe billing itself a rental site instead of a purchase site would make the difference.

Finally, renting and selling are two very different propositions. GameFly offers all-you-can-eat memberships beginning at $7.95 a month -- again, similar to Netflix. The benefit is that you can try a game, send it back for another title or, if you really like it, just hold on to it longer.

Purchasing even a low-cost title, by constrast, requires commitment. What if the game sucks? You're not getting that money back, nor can you delete the game and download another one without pulling out your credit card. GameFly's decade-old following seems built on one model, but now the company expects it to embrace a totally different model. Hard to see that going well.

Photo courtesy of wollombi