Netflix Flirting with Gaming Industry: Smart or Dumb?

With over 200 million subscribers and intense competition from Disney, Amazon, HBO Max, and the likes, the biggest question of the year was, can Netflix keep growing?

Well, financially, it has never been better. According to the forecast, its cash flow would break even this year, eliminating its requirement to secure external financing for its everyday operations for the first time (1).

It is important because even though there have been no changes in its subscription price in India, it had increased its charges in the USA last year and still added a record 37 million new subscribers. However, as the coronavirus pandemic winds down and competition gets fierce, there is no clarity whether Netflix can sustain the pace.

According to JustWatch, an analytics firm (2), Netflix’s share in the US market is already declining. And the debt which financed much of its enormous content is looming.

In its most recent earnings report (3), Netflix’s balance sheet indicated about 8 billion USD due within a year and an additional 20 billion USD. Flushed with capital, however, the company has pledged to cut its debt load to a sustained level of 10 billion to 15 billion USD.

Now, the question mounted up to, how can Netflix windows the debt while simultaneously growing its revenues? The company has already expanded to more than 190 countries, which means it only has some new markets to tap. Would Netflix squeeze more subscribers from its current market? Or may it keep looking to squeeze more from its existing subscribers? (4)

And Netflix has its answer: Gaming.

Netflix Forays into Ecommerce

Earlier this month, analysts at Bank of America stated that despite the intense competition among video streaming platforms, Netflix would remain as the content king.

Notably, the streaming wars are amid an intense consolidation round. Amazon acquired MGM in late May (5), following a mega-merger of Warner Media, HBO Max, and Discovery (6). Both deals are subjected to regulatory approval.

According to analysts, Netflix is looking at franchises and other intellectual property it can spin into new movies and shows to bolster its library (7). It is an opposite approach than its competitors, as Amazon spent about 8.45 billion USD to acquire MGM Studios for the iconic Hollywood studio’s library content.

Netflix is also moving deeper into ecommerce to gain an edge over other streamers and increase its revenue streams. Last month, the company opened a new online store for selling merchandise related to its shows and brand (8). It includes streetwear and collectibles from the anime series Eden and Yasuke and other decoratives and apparel.

Netflix’s first direct foray into commerce was first available in the US and would launch to other countries in the upcoming months. The online shop products are all limited edition and have a current price range of 30 to 135 USD.

The platform has a distinctive Netflix style and indicates its merch collaborations with Jordan Bently, Kristopher Kites, and Nathalie Nguyen.

Netflix Eyeing Video Games

Moreover, in May, several reports started emerging that Netflix will offer a gaming bundle as soon as 2022. As per the reports, after the immense success of the “choose your own adventure” kind of movie, Black Mirror: Bandersnatch, the streaming giant is expanding further into gaming with a new bundle for Netflix subscribers (9).

It is worth highlighting that Netflix has numerous titles based on popular video games like Resident Evil, The Witcher, Castlevania, etc., which means the company knows the value of video games. It is not offbeat to believe that the company would market its series via new gamers or make a new game that would eventually become a new Netflix show or movie in the future.

Netflix appeared on its way in 2019, when it collaborated with Telltale Games on a Stranger Things game (10). Notably, several companies are trying to create a service that is Netflix but for games. Xbox Game Pass and Apple Arcade are only two which come to mind. But Netflix’s foray into gaming indicates that Netflix is also looking to have a chunk of the 200 billion USD gaming pie.

Why Netflix Believes that Gaming Would Work

Netflix had started by shipping DVDs to people via the mail. Then, it started streaming other people’s TV shows and movies. Later, it started making its own content. And now, it is eying video games.

Earlier this week, Netflix formally told its investors that it is in the early stages of expanding into games (11), saying that it is an extension of experiments the company has done with its programs like Bandersnatch.

Here is why Netflix believe it would work:

Netflix would bundle the games for free into its main application, and for the time being, it will be available for smartphones and may eventually migrate to TVs.
Netflix believes that some of its gamers will connect with Netflix-owned franchises, Stranger Things game, for instance, but it may also license existing brands and games from other developers.
The company is describing the gaming move as the first step, ” We believe the time is right to learn about how our subscribers value games,” said Netflix in its quarterly earnings release. However, it also said that it expects to be in gaming for the long term. ” It is the core part of our subscription offering,” said Greg Peters, Netflix’s CEO, during its earnings call.
Netflix believes that the primary value of its gamers would keep existing subscribers more engaged with Netflix and hence less likely to unsubscribe. In theory, the game could also help drive new subscribers.

Netflix’s Gaming Foray Obvious, Yet Surprising!

If you have kept tabs on Netflix over the years, you know the move was coming. Reed Hastings and other Netflix executives have mused for years about how gamers are major competition sources for Netflix users’ time and money. The Information (12) had earlier reported that the company is looking to offer a bundle of gamers to subscribers as Apple offers via its Apple Arcade. And last week, Bloomberg (13) had reported that Netflix had hired an executive to run its upcoming services.

Notably, Mike Verdu, a former Electronic Arts Inc and Facebook Inc executive will join Netflix as VP of game development to lead its gaming effort. Verdu had previously worked with Facebook as VP, working with developers to bring games and other content to its Oculus VR headsets (14).

According to Bloomberg’s sources, Netflix is looking to offer video gamers on its platform within the next year. The game would appear alongside its current fare as a new genre, similar to what the company did with stand-up specials and documentaries.

At the same time, if you have kept tabs on Netflix over the years, the move may surprise you as it is a real departure from its strategy, its insistence on concentrating on doing one thing well.

For years, Netflix officials have been asked when they will foray into live news or sports or start ads to its service. The answer is always the same: Netflix believes a single-minded focus is the best way to win and branding out of on-demand video content would be a distraction.

Now, Netflix is saying that it is willing to try something new and arguing that free games are a reasonable extension of what it has already been doing. Netflix’s subscription model means “we don’t have to think about in-game ads, purchases, or other monetization; we don’t have to worry about per title purchases,” said Peter during the earnings call.

Why Gaming May Not Work Well For Netflix

Netflix argues that yes, it doesn’t know anything about making and hosting video games, but it also didn’t know anything about making its own content when it made House of Cards in 2011, yet everything has worked out fine since then.

However, it seems like a stretch. When the company talked about its first movie into original content, it believed its subscribers would like the show because they like dark political soap operas. Moreover, even though Netflix didn’t know anything about making shows when it shared a decade ago, it didn’t have to know that. Netflix paid Kevin Spacey, David Fincher, and Media Rights Capital to make the show and then streamed it to its subscribers the same way it already streamed other movies and shows on its platform.

However, it is a very different skill set compared to making shows and moves when making games, which is why most big giants have failed whenever they tried to get into games, including companies like Apple, Amazon, and Google. They have all tried to swing but missed to different degrees. Hence, Netflix’s foray into games can flop as well.

On the other hand, as we discussed in our gaming story, today, gamers are bigger than movies and songs combined and are not going away. Even if it takes a long time to figure out, it is still better to get started sooner than later.

Why is it Good?

One can also say that Netflix is tired of everyone calling Microsoft Game Pass “the Netflix of Gaming,” Hence, it started to foray into it now (15).

When the streaming giant revealed about hiring Verdu, we knew that Netflix is not looking to host or stream games but wants to publish them.

For those who have not followed the gaming industry closely, developers make our games, and publishers help those titles into the stores and our hands, be it real or virtual. They are not mutually exclusive; some big players like Ubisoft and EA publish their own games. However, essentially, one can’t be successful without the other.

There is a lot of money involved in publishing video games. The market is crowded and highly competitive, though as of not lately since Microsoft and Sony have been garnering as many studios as possible to bring them under their “family of studios” and make them exclusive to their hardware.

It is not an economic or simple process, especially if Netflix chooses to develop its own games. As we noted, Google Stadia had to close its first-party studio (16). Amazon Game Studio had to lay off several employees before it could ship even a single title (17). If giants like Amazon and Google struggle to create their own titles despite their huge funds and resources, it will be interesting to see where and how Netflix inserts itself.

Netflix holds a strong position in the global streaming market, which gives it an edge and would make it the first company to provide a complete entertainment bundle, movies, TV shows, and games – for what we hope will keep being a single monthly payment, as right now, it is one of the few subscription services that unfasten everything on its roster. (I am tired of looking to watch something interesting on Disney+ Hotstar, only to realize it is not included in my VIP subscription.)

Even though we are throwing around the term “Netflix of gaming” quite a lot, it is a tad misleading because none of them, with the possible exception of Microsoft Game Pass, come anywhere close to that. Not all are built equally; some are limited to certain platforms, devices, prices, and availability. Some like PS Now and Nintendo Switch Online specialize in offering retro games that one cannot get unless you have kept your old-school consoles. Ubisoft Plus is only available on PC. Others like EA Play and Microsoft offer users their first-party new releases since day one as part of the services. However, the former restricts your playtime to the initial 10 hours. It is so hard to keep up (18).

We believe it is a big problem; it is hard to remember what the different services do and don’t provide. There are many of them; PlayStation Now, Nintendo Switch Online, Microsoft Game Pass, EA Pay, Google Stadia Pro, Apple Arcade, Ubisoft Plus.

Previously, it used to feel like a cost-cutting exercise, like how many games one could play for free as a part of a cheap monthly subscription. However, today, one can end up losing hundreds of dollars a year if one’s tastes are broad and enjoy different games on different products. Moreover, one won’t ever own a single game unless one chooses to buy them separately, which makes us question why are we paying for a subscription? After all, the minute our subscription lapses, which we have all done from time to time, we lose the games that we have kept tucked safely in our libraries.

And that’s our real worry. We are tempted by Xbox Game Pass, especially its Ultimate version, which comes with Xbox Live Gold – another cost, or Ubisoft signature formula with its huge library. While Microsoft may win today’s “console war” with its Xbox Game Pass, there are still several drawbacks to subscription services.

With that being said, we are a tad excited about Netflix opening its basket to include video games. Added pressure from a new but popular competitor can be good for us, the people who purchase and play games, and maybe even tap those casual or lapsed gamers into its fold.

Even though there are still no details about what types of games it will avail, or how they would be offered to subscribers, let’s hope Netflix bundles it into our existing plan as we don’t want to fork out another subscription that we would probably never use.

The Final Verdict

Earlier this week, the US-based streaming giant announced that it would feature video games with its regular offerings. It is a move that can result in a significant revenue surge for the company.

However, as we discussed, big tech’s attempt to foray into the gaming industry has cost them expensive failures in the past few years.

However, as per the Inverse report (19), Netflix may not repeat the same mistakes as tech giants and would enter the space with caution, having learned from the missteps of Google and Amazon.

Netflix will probably also use its new video game streaming prices. Instead, it would use it as a way to cross-promote Netflix’s original offerings and encourage its members to spend more time on the platform.

It also raises questions like Netflix is challenging Sony and Microsoft by adding a plentiful game library on its platform. According to the Inverse, it is not that plausible; Netflix is more likely offering games as a complementary experience to increase engagement and keep users on the platform longer.

In such a case, “complementary” sounds like a game on a much smaller scale than titles like Call of Duty from much bigger franchises. People are not going to play Netflix games over the next big Assassin’s Creed.

And since Netflix lacks the experience and expertise needed to work on larger-scale games as we get on consoles, it would be similar to an add-on gaming service like Apple Arcade and then rolled into the standard subscription.

The success of xCloud and Microsoft Game Pass is enough proof for us to know that the gaming market has sustainability for subscription-based content services. Depending on how successful Netflix’s initial endeavor is, we can expect Netflix to start working on bigger-scale games as we get on a console. However, we can’t expect it to happen right away. And there is no chance for companies like Microsoft to lose their sleep over Netflix anytime soon.

Wrapping Up

Netflix original series such as Castlevania, The Witcher, and League of Legends are all examples of cross-medium which the company can use to roll out non-gamers into the gaming space. It is an established tactic. After the release of The Witcher Netflix show in December 2019, Witches 3: The Wild Hunt, a video game, increased by 554% y-o-y during the same month (20).

Sony is also taking the same approach with its upcoming movies and shows Uncharted, The Last of Us, and Twisted Metal, using cinematic adaptations to increase the original game’s popularity. It would lead to more sales for video games while also taking advantage of a built-in audience for those video content (21).

Netflix can do well if it enters the gaming space since it already has an established audience. Imagine a board game based on Stranger Things, followed by an RPG-style title; it does make sense.

However, the company doesn’t have to issue existing IP first-party ports. Instead, Netflix can think harder and risk more to stand out. Its gaming plan doesn’t sound too dumb anymore, does it?

What are your thoughts on the same? Let us know in the comments. Stay tuned for more updates!