"We compete with (and lose to) Fortnite more than HBO," Netflix (NFLX -3.92%) CEO Reed Hastings wrote to investors in January 2019. Two-and-half years later, Netflix is making moves to help it stop losing screen time to the popular video game.
The leading video streaming service is planning an expansion into video games in the next year, and it's hired Mike Verdu -- a former executive at several video game companies -- to lead the charge. The move has the potential to increase engagement, subscriber retention, and expand Netflix's appeal for both consumers and content creators.
Image source: Getty Images.
Getting in the game
Netflix has been experimenting with interactive content for several years. It produced several choose-your-own-adventure style films, breaking through with Black Mirror: Bandersnatch in late 2018. On the 2018 fourth-quarter earnings call, product chief Greg Peters and CEO Ted Sarandos talked about the extension of storytelling to interactive content.
"It sort of extends the pallet and the portfolio, the tool set that the storytellers that we're going to be working with in the years to come have to tell their stories in the most compelling way," Peters said.
Adding full-blown video games is merely an extension of interactive content on Netflix. In fact, Netflix is planning to release video games right alongside regular video content on its platform.
Its biggest opportunity right now is to create video games based on popular original series and films for which it owns the intellectual property, like Stranger Things. Doing so would be another example of Netflix following in the footsteps of Disney (DIS 0.18%), which has developed games and licensed its IP to developers since the days of the Atari 2600.
Reinvigorating domestic growth
A few successful video game titles will improve engagement among Netflix's existing subscribers. Winning back time from Fortnite and other video games means Netflix is providing more value for subscribers. And when Netflix provides more value to subscribers, it can raise its price, just like it's consistently done over the last seven years.
What's more, the move has the potential to expand the audience for Netflix. The service's subscriber growth slowed considerably in the U.S. and Canada over the last few years as the company neared saturation in the market. Giving consumers another reason to sign up for Netflix could help it keep growing its subscriber base in mature markets.
Of course, success isn't guaranteed. It's not like every new series or film Netflix creates is a hit, and when the output is limited (like in the early days), both the hits and misses get magnified. Even Disney struggled to make an impact with its video games before it decided to license its IP to other developers.
Where it goes from here
Far from just a reference to other screen-time activities, Netflix is taking gaming seriously. It's an area certainly worth exploring considering consumers spent more on video games globally than movies last year, and that's not expected to reverse anytime soon.
If Netflix finds success with the format, it's just a step away from becoming a new distribution channel for developers looking to get their games in front of more than 200 million consumers around the world. That could greatly expand its audience, allow it to keep raising prices, and truly differentiate itself from the growing competition.
That said, video game content won't come cheap, and neither will attracting gamers away from established platforms. Big-budget video games can cost as much as blockbuster films.
After over a decade of successfully expanding its content budget and the breadth of its library, Netflix's management knows how to quickly determine the value of content and whether it should pursue more or less of it going forward. Investors should expect the same ability to quickly scrap what doesn't work and scale what does in video games for Netflix.
