Over the past several years, the traditional video-rental business has been in decline. One factor for the slump is the rise of Netflix. Founded in 1997, the increasingly ubiquitous service lets subscribers rent an unlimited number of DVDs, all for a flat fee. Customers pick the DVDs online and have them mailed to their homes, bypassing often frustrating video-store visits and late charges.
Though many outlets rent games as well as DVDs, another reason video-rental stores are taking a hit is the increasing popularity of video games. So when GameFly launched in 2002, it seemed like a perfect idea. The company would apply Netflix's successful unlimited mail-rental model to games, allowing subscribers to rent titles on all current console and portable platforms.
Four years later, Netflix has mushroomed into a publicly traded multibillion-dollar corporation with distribution hubs all over the country. By contrast, GameFly remains privately held, and its operations are still limited to a single Los Angeles shipping center.
However, the face of the game-rental business may soon change. With third-party Xbox 360 games already costing $59.99, many analysts are expecting similar sticker shock when the first PlayStation 3 titles hit store shelves in mid-November. Though the Wii remains the wild card in the next-generation console race, Nintendo will have to make up for the cost of its console's low price--expected to be under $250--somewhere.
The rising price of games will likely force many gamers to reevaluate how they buy games. That, according to Sean Spector, is where GameFly will come in. The company's cofounder is betting that the cost of the next-gen console war will be a boon for his rental service, which is already allowing customers to reserve PS3 and Wii games. GameSpot sat down with the executive, who could pass for a close relative of Keanu Reeves, to find out.
GS: So do you guys mind being referred to as "Netflix for games"?
SS: That's a fair comparison.
GS: Netflix got very huge very quickly. Do you guys have any plans for expansion?
SS: Growth is our number one objective. What's going to happen soon is there's going to be two new systems, and we're going to support those--we're already supporting those on the Web site...
GS: But what about expanding actual operations? I know one of the more frequent criticisms of GameFly is that you guys only have one Southern California distribution hub...
SS: You know what's so interesting, someone pointed this out to me: Netflix had only one [San Jose] distribution hub for many, many, many years.
GS: Yeah, I know. My stepfather in Milwaukee would always complain, "I didn't get my DVD for a week!"
SS: Well, they've been around for around 10 years and we've only been around for just four. In terms of expected growth, we're ahead of our own expectations. We obviously do have future plans for a new distribution center, but nothing that we're ready to announce.
GS: How many subscribers does GameFly currently have?
SS: We don't ever disclose numbers, but we have a really great and active base of subscribers.
GS: Most video-rental chains rent both DVDs and games. Have you ever thought of doing a deal with Netflix to provide games as well?
SS: You know what, they've stated publicly that they're focused on movies. That's really their number one objective and they're trying to figure out the whole download component to their business. We're so focused on games, we have no intention of doing movies.
GS: So why do you do UMD movies, then? [UMD--Universal Media Disc--is the format used by the PSP.]
SS: We do UMD movies, really, because of the form factor and the fact that it's playable on a game system. We don't have any plans to do HD-DVD or Blu-Ray. We're really focused on the gamer.
GS: You recently put up product pages for Wii and PlayStation 3 games...
SS: I think we have 27 PS3 and something like 30 Wii titles.
GS: Do you have any idea when the so-called "launch titles" for the platforms will actually launch?
SS: We've heard November. That's what we've heard.
GS: What about the Wii itself? Do you know when that will go on sale?
SS: We heard it could be sooner. It takes a little bit of time to build up a really cohesive marketing campaign. So I don't think it's coming out next week. But it could come out in October, or it could come out at the end of September.
GS: Obviously, you guys already rent Xbox 360 games. What's your take on the next-generation console war so far?
SS: Obviously, the games are important. So you'll see [that] Gears of War is already being put in people's queues. Halo 3 has been in people's queues for months, but we don't even have a release date. But the folks are so passionate about games and so passionate about the service, that we feel it's important to let people sort of tell us [what] they want way in advance.
GS: We've been looking at the NPD numbers the last couple of months, and we know that current-generation Xbox sales have gone way down, as have the Game Boy Advance game sales...
SS: We've seen a big shift from the Xbox to the 360. Close to half of our base has a 360. So they're migrating right now from their old software to the new software. And with the price point being around $60 for 360 games, GameFly has a tremendous amount of value for someone who owns an Xbox 360. With a new console launch, there's a lot of software you're not sure about. So renting makes a ton of sense. We'll see the same thing with [the] Wii and PS3.
GS: Right. Now, GameFly launched in 2002. You're going on four years. But you guys launched after the current generation of consoles was already available, so you've never had to deal with a format, in a sense, dying. What's your plan for what happens when the Xbox, GBA, GameCube, and PlayStation 2 are discontinued?
SS: Well, the Xbox hasn't died for us. I mean, I think it's died more for retail than it has for us. The reality is, Microsoft sold probably 20 million Xboxes and they've sold about 5 or 6 million 360s. So there's still a lot of people with Xboxes. There are still a lot of people playing those systems. There [are] a lot of people [who] have upgraded to the 360, but they've given their younger brother or their younger cousin their Xbox. That person needs games, and retail, like you said, really isn't supporting the Xbox as much as they were a year ago.
Also, we sell most of our games to our members by just allowing them to keep a game they already have. So we do a good job of managing that inventory--we're not sitting around with a bunch of Xbox games. A year from now, we won't be sitting around with a bunch of PS2 games. Our members are really good with purchasing games or really good at selling games to nonmembers.
GS: Will GameFly ever sell used games at a retail chain?
SS: No. Currently, we only sell our games at GameFly.com.
GS: Now, there was also a rumor going around that the PlayStation 3 is not going to be able to play used games or rented games. Sony has, for the most part, denied that. Obviously, if that were to happen, GameFly's business would be severely affected.
SS: We've heard probably the same rumors you've heard. Sony's really the best one to ask for that, you know? I mean, are they really going to do that, or is it just technology that they've got?
GS: Right, but what would you guys do if Sony did implement a system like that down the line?
SS: That's a good question. I mean, we really need to wait and see what happens. You know, the neat thing is 30 percent to 40 percent of our business is PS2, and the other 60 percent to 70 percent is 360. It's also going to include the Wii and it already includes [the] GBA, DS, and PSP. So we're not dependent upon any one single platform.
GS: Now, that kind of segues into my next question. Now, looking into the far-future idea, many publishers are very excited about online distribution of console games. You're already seeing that to a certain extent, with downloadable demos for the Xbox 360.
GS: Now I know a lot of people rent games through GameFly just to try them out. But, if I can download a demo off Xbox Live Marketplace in 10 minutes and try it, then why bother renting it? Are you worried online distribution will impact your business at all?
SS: It hasn't. I think it's only helped, really. The more people have access to try stuff, whether it's a single level or an entire game, it gets more people playing games. So for us the 360's been incredible. The fact that close to half our base has a 360, that's pretty telling about our membership base.
As for downloadable games, I think it will come someday, but I don't think in a meaningful way. I think it's five to 10 years away. Remember, the consumer still likes to go to retail. Think about World of Warcraft. They have over 6 million subscribers, and most of those people walked into a retail location and bought that initial disc. People like that retail experience. I don't think that's going away any time soon.
GS: But isn't GameFly designed to help people avoid the physical retail experience to a certain extent?
SS: Well, yes. I mean we're an online retailer. So it's a little different but it's not completely different.
SS: If downloadable games become the next big thing, by then we'll have a very sizeable membership base...consumers don't want to go to five different publishers to download games. They're going to want to go to an aggregator. In the retail world that's Best Buy. In the cable world that's like an HBO. So I think we're in a good spot if that happens.