Game Rental Service Delivers New Business Model

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GameFly has been shipping video game rentals to customers via snail mail since 2002. Now, the Playa Vista company is adding roadrunner-like speed to its distribution with digital downloads.

GameFly plans to launch the digital element to its business later this year to let customers download games directly to their computers.

It’s become a big trend in the industry.

“What GameFly is staring at is a paradigm shift,” said Scott Steinberg, head of video game consulting firm TechSavvy Global. “Digital distribution is becoming a more relevant part of the gaming world. GameFly is simply looking to expand the options it has to connect to its customer base.”

GameFly’s Chief Executive David Hodess has been planning a digital push for the last year. That’s one of the reasons it acquired Direct2Drive.com, a Costa Mesa digital distributor of video games, from San Francisco’s IGN Entertainment in May.

Now a 200-person company, GameFly has been using the rental model made famous by Los Gatos-based Netflix. The company mails console video games to subscribers who pay from $15.95 to $36.95 a month depending on how many games they want to rent at one time.

The new GameFly Digital, which will launch before the holiday season, is an application that anyone can download for free. It will feature the latest gaming news from GameFly-owned website Shacknews.com, social networking feeds, game trailers and videos, and access to all downloadable games, which can remain with the customer permanently.

Nonsubscribers will be able to purchase a game to download. Prices could range from less than $5 to $60. Customers with GameFly subscriptions will get unlimited play of some games, although they will have to pay for others.

The digital effort will add computer games to GameFly’s subscription offerings for the first time. It only rents console games by mail; subscribers can continue to do that. The company now offers more than 8,000 console games for mail rental.

“We’ve always gotten requests asking why we don’t rent PC games, and they started to make sense for us when they went digital,” said Sean Spector, company co-founder and senior vice president of business development and content. “A large percentage of our members play PC games and download PC games. Why not do it with us?”

GameFly Digital will have more than 1,500 digital computer games for sale and hundreds that subscribers can rent, Spector said.

Digital competition

Liam Callahan, a senior category specialist in games for Port Washington, N.Y., research firm NPD Group, said GameFly’s current subscribers should take to the new downloadable computer games because 70 percent of the company’s subscribers are also PC gamers.

“This bodes well for them as they add PC digital downloads to their service,” he said.

But GameFly could be a little late to the digital game. Grapevine, Texas, retailer GameStop began selling digital downloads last year; OnLive in Palo Alto launched its game streaming service last year; and Bellevue, Wash., game developer Valve Corp. launched digital distribution website Steam in 2003.

GameFly will face more competition in the digital distribution market than it does with its traditional rentals, but could still find an audience with its current subscribers, said TechSavvy’s Steinberg.

“To GameFly’s credit, they’ve got a sizable customer base that they’ll be able to get games in front of,” he said. “It would certainly seem like a natural extension of GameFly to emphasize the rental of games rather than purchase.”

The company filed in February last year to raise up to $50 million in an IPO, but has not updated its filing in nearly a year, a sign that it has either set aside or abandoned its public debut.

Spector would not comment about the status of GameFly’s public flotation. When the company last filed in September, it reported about 410,000 subscribers. Net income was $500,000 for the fiscal year ended March 31 on revenue of $101 million.

Mike Hickey, an analyst who covers video game companies for Janco Partners in Denver, said the rental market has not shown the potential that some expected because gamers are more likely to buy a game at full price and later resell it rather than rent.

“The rental market has never really taken off,” he said. “The idea of renting is not really appreciated that much.”

Spector said the company might eventually consider expanding its technology to include streaming video games that people can play directly from an Internet browser instead of downloading to a computer.

“We’re keeping a close eye on the streaming technology, but we’re starting with a model that’s proven and works,” he said. “We want to give gamers the widest selection possible.”

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