Why Netflix is ​​getting into the game

For years, Netflix has watched the world’s biggest tech companies try to position themselves as the “Netflix from the game” – and worried about the opportunity to join them.

Google, Amazon, Microsoft, and Sony have all rolled out video game streaming services that use sophisticated cloud technology to bring console-quality video games to any device, just like watching a Netflix show.

“We’ve been talking about video games for several years, writing down the pros and cons of the timing of entry,” Reed Hastings, CEO of Netflix, said this week.

Hastings, who says he likes to make “as few decisions as possible,” ultimately decided to press the start button for Netflix’s gaming business. After hiring A former Electronic Arts executive to lead its interactive team, the video streaming company announced this week that games will soon be added to its mobile apps as part of customers’ existing subscriptions.

But rather than take advantage of its streaming technology to compete with Google Stadia or Microsoft’s xCloud, Netflix’s strategy is more akin to earlier efforts by Hollywood studios such as Walt Disney and Warner Bros. to develop games based on franchises such as Batman, Lord of the Rings, and Spider-Man.

“We’re creating these amazing worlds, these great storylines and these amazing characters” in his original movies and TV series, Greg Peters, Netflix’s chief product officer, told investors on this week’s earnings call. “And we know the fans of these stories want to take it further.”

Viewers of blockbuster shows such as Stranger things, money theft and Black mirror might be excited about Netflix’s switch to gaming, but analysts and investors are more divided over the heavily indebted company’s new foray into a large but intensely competitive part of the entertainment market.

Despite a series of carefully choreographed announcements about its expansions in retail, podcasts and games in the weeks leading up to its earnings report, investors remained focused on the challenges facing its core business, as economies reopen and streaming competition intensifies.

Registrations in North America have halted in the past six months. From April to June, 430,000 people canceled their Netflix subscriptions in the United States and Canada. Over this same period, HBO Max added 2.4 million subscribers, albeit from a much smaller base, while some believe Netflix is ​​reaching saturation point in its larger markets.

After years of dizzying growth, “middle age seems to be setting in,” said Michael Nathanson, analyst at MoffettNathanson. Its stocks have lost 5% this year, while the benchmark S&P 500 has gained 16%.

As Netflix looks for new ways to retain its 209 million paid subscribers, games could be a way to lower the churn rate as Disney, Apple, WarnerMedia, Comcast, Discovery, and ViacomCBS all seek to attract its subscribers.

Wedbush Securities analyst Michael Pachter said Netflix also appeared to be using games as a “shiny new object that could distract investors from what we perceive to be. [its] slower growth ”.

“Disney has tried and failed to create a games division three times” over the past 20 years, Pachter added. “Very few films make games of them. . . I don’t see any [Netflix] properties except Strange things that would make a good game. Bridgerton? Ozark? Murder mystery? Puhleeeez. “

Others adopted a more optimistic tone.

Netflix at least has its own entertainment properties to lean on to get into gaming, said Piers Harding-Rolls, head of games research at Ampere Analysis, unlike Google or Apple.

Compared to the tens of millions of dollars it takes to create a successful console game, the stakes are rather lower in mobile games, where Netflix has said it plans to focus. Harding-Rolls estimates that a 5-10% increase in its annual content budget of $ 17 billion would be a “solid pot for a good number of mobile games.”

Peters said Netflix will seek to both develop its own games and license them to others, in the same way it has grown its video business over the past decade.

He also sees the possibility for Netflix to offer game developers and gamers a better deal through subscriptions. “We don’t have to think about advertisements. We don’t have to think about in-game purchases or any other monetization, ”Peters said.

This is not a new business model for video games. Analysts estimate that tens of millions of people subscribe to console services like Xbox Game Pass or PlayStation Plus.

But it’s relatively new to mobile devices, where Apple Arcade and Google Play Pass, which each cost $ 5 per month for unlimited access to a set of games, are seen as progressing more slowly.

Netflix is ​​already “very popular” among gamers, said Karol Severin, analyst at Midia Research. Midia polls show 76% of console gamers and 69% of mobile gamers use Netflix every week, compared to 57% of all consumers.

This “almost guaranteed engagement” will be a powerful draw for developers, he said, alongside the company’s strong track record of data-driven user recommendations and content provisioning.

“Entertainment is converge, Séverin said. “Whether you are a video, games, music, sports or social media proposition, you are ultimately competing for the same entertainment time and the same money.”