For more than 20 years, Netflix (NASDAQ:NFLX) has provided its customers with access to television shows and movies, first on DVDs and now through streaming.
The company has always been disciplined with its approach. It's rejected calls to get into providing live TV like sports or news, and it has resisted the idea of monetizing its platform through advertising, choosing instead to stick with a simple subscription-only plan.
Now, Netflix is ready to break that mold. The company said in its second-quarter shareholder letter that it was in the "early stages of further expanding into gaming," and that it views gaming as another content category, like unscripted shows or animation.
Management said it would begin with mobile gaming, but tamped down expectations on the second-quarter earnings call, saying that it views games as complementary to streaming and that streaming would remain the core of the business. It also said that it would not try to monetize games directly, using them instead to drive overall subscription growth and retention. Games will be included at no extra cost in all of Netflix's subscription packages.
While it may seem like Netflix is arriving late to the gaming arena, there are still at least three reasons to believe the streaming giant could succeed in this new category.
1. Netflix has a huge platform
Netflix's customer reach alone gives it the opportunity to be a powerhouse in gaming. The company has more than 200 million paying subscribers around the world, and many of its customers spend hours a day on the platform. While Netflix users come to the service to watch TV and movies, the company knows that ultimately its customers are looking for entertainment. Management considers its competition to range from Alphabet's YouTube to social media platforms like ByteDance's TikTok to video games, in addition to other streaming services and linear TV.
Additionally, launching mobile gaming makes sense. It won't require any additional hardware; the interactivity is built into the devices; and most Netflix users already have the app loaded onto their devices. According to Apptopia, Netflix was the 10th-most downloaded app in the world in 2020, with 223 million downloads, and it was the only one in the top 10 that doesn't provide a free service. It's a good bet that many of the subscribers who come to Netflix for shows and movies would be happy to try out games on the platform as well.
With a global brand and a giant built-in audience, Netflix should also be a highly appealing partner for game developers. Chief product officer Greg Peters said as much on the Q2 earnings call, arguing that because Netflix wouldn't be concerned with monetization tactics like advertising or in-app purchases, it would be more attractive to developers: "So we're finding that many game developers really like that concept and that focus and this idea of being able to put all of their creative energy into just great gameplay, and not having to worry about those other considerations that they have typically had to trade off with, just making compelling games."
2. There's crossover potential with its intellectual property
There's no shortage of intellectual property (IP) in Hollywood that has become video games or, in turn, video games that have become movies. Among games that have become hit movies are Mortal Kombat, Tomb Raider, and Sonic the Hedgehog, while there are plenty of success stories in the other direction like Goldeneye 007, Mad Max, and Indiana Jones and the Fate of Atlantis.
Netflix has historically lacked the kind of monetization machine that Walt Disney has. When Disney makes a hit movie, it lives multiple lives as theme-park rides, toys, and live events like musical theater or Ice Capades -- and as games, which it generally licenses to developers.
It's easy to imagine some of Netflix's hit shows like Narcos, Ozark, or Stranger Things translating into games. A show like Queen's Gambit, for example, could have easily lent itself to a themed chess game based on the show.
There's also the potential for Netflix's gaming IP to move in the other direction. If the company launches a hit mobile game, the infrastructure to make those characters into a show or a movie is readily available. Peters acknowledged that this was part of the strategy on the call: "Part of that will be games that extend our IP. We think that's a really rich, rich space, so that's very much part of our long-term thesis."
Netflix is also planning to do stand-alone games. Overall, the complementarity between games and video entertainment is powerful, especially for a platform with so many paying subscribers.
3. Netflix has a great track record
Netflix doesn't move into new businesses thoughtlessly. Over its history, the company has been incredibly disciplined, making two large leaps -- from DVDs to streaming, and then from licensing content to producing original shows and movies. Though its brief attempt to separate the DVD business under the brand Qwikster was a failure, Netflix is not a company that blindly enters new experiments, and it understands its core competencies well.
Co-CEO Ted Sarandos mostly dismissed the idea of getting into sports again, saying on the call: "Our fundamental product is on-demand and advertising-free, and sports tends to be live and packed with advertising. So there's not a lot of natural synergies in that way, except for it happens in television."
Co-CEO Reed Hastings also said that video gaming was something the company had discussed for years, and decided on going forward with because it shares a lot of qualities with video entertainment: "You're going to have these long franchises and very positive for us, kind of industry-structure-wise, if we can master the skill set."
While video games aren't a slam dunk for Netflix and will likely take years to come to fruition, the new direction also shows that the streaming champ is looking for new opportunities as its growth rate in streaming slows.
With more than 200 million subscribers and one of the best-known brands in entertainment, it would be a mistake to count out Netflix in video games.