When Netflix (NFLX -8.92%) started talking about video games, investors were left pondering how that effort might play out. The company's initial launch of mobile gaming titles last November didn't add much color to the picture, with just four simple games and no obvious long-term strategy.
Four months later, we have some more evidence on the table. Netflix has 14 mobile games and 18 interactive-video options available now, and the company just bought another game developer.
This puzzle is starting to make sense. Let's see where Netflix's gaming ambition is going in the long run.
Image source: Getty Images.
The puzzle pieces
At first glance, Netflix's collection of assets related to video games looks like a disorganized mess. The mobile titles range from toddler-friendly pattern-matching and pet-dressing trifles to sophisticated dungeon crawlers and Rogue-like card games. Only three of these games have any obvious ties to Netflix's original shows or movies.
The quality of the gaming experience is uneven. Some titles are clumsy conversions of existing PC or console games, where the controls don't always make sense on a tablet or smartphone.
Interactive videos mainly focus on content for younger kids, but adult fare -- such as Black Mirror: Bandersnatch -- is thrown in for good measure. Again, the experiences go from the polished and complex Bandersnatch to incredibly simple meditation tools and animated picture books with a choose-your-own-adventure twist.
As for Netflix's gaming-related acquisitions, they do seem to target the company's own intellectual property -- with some fringe benefits. The just-announced $72 million buyout of Finnish game-developer Next Games involves the maker of a Stranger Things-themed puzzle game. Next has also developed two successful Walking Dead games with a brand license from producer AMC Networks.
Earlier, Netflix picked up Night School Studio for an undisclosed sum, locking down another game developer with experience in the Stranger Things world. Night School also has a history of licensed development, having published a game based on Comcast subsidiary USA Network's Mr. Robot.
Presiding over this jumble is the game division's vice president Mike Verdu. Netflix snatched Verdu away from the title of augmented and virtual-reality chief at Meta Platforms, when that company was known as Facebook. Further down on Verdu's CV, he used to run Electronic Arts' mobile-gaming division. That's an impressive and relevant industry pedigree.
What it isn't
Netflix is not setting up a tightly focused game portfolio here. Much like its original video content, the company offers options for many different tastes, not zooming in on any particular age group or game type.
It's also not a concerted effort to promote the video service. Apart from a few direct links to the Stranger Things phenomenon, you'll find that most of the game titles have nothing to do with Netflix's originals.
These video games are not a cash-grabbing operation. None of the games feature in-game advertising or items for purchase within the gaming platform. As long as you have an active subscription to the Netflix streaming service, the company isn't pinching another penny out of your pocket.
What it is
Netflix is setting up a robust framework for its gaming service. And it's a significantly different experience from where the rest of the industry is going.
It's hard to find a game these days that doesn't try to squeeze a few extra pennies out of you through advertising and/or microtransactions. Where Netflix is republishing games formerly available on other platforms, the new version comes without whatever pay-to-play functions that might have been present in the original game.
That's a refreshing change of pace. Netflix is doing more than just unboxing some prepackaged idea of how video games should work, and particularly how the publisher should monetize the product. And we have seen Netflix play this role before when it upended the standard operating procedure for movie rentals with its iconic red DVD mailers -- and then again, when the digital-streaming service made us forget about DVDs.
What's next?
The Netflix model has attracted 222 million paying subscribers so far, generating $29.7 billion in top-line revenues and $5.1 billion of bottom-line profits last year. Yet after all these years, nobody is doing exactly what Netflix does in the video-streaming market. Every rival service includes some combination of advertising breaks, ad banners in their video-selection menu systems, ways to upcharge the customer on top of the monthly subscription fees, and so on.
There's a place for these competing ideas, and some of the alternative services are also winners. But Netflix has found the secret sauce to building the most popular video-streaming service on the planet, and the video game sector just might be next.
Just wait and see. In a couple of years, we'll probably hear that Netflix is separating the games from the video content, creating another subscription service. Some users may complain or even cancel their subscriptions while Netflix shares fall, carrying echoes of the Qwikster debacle in 2011. And then Netflix gets a second (the microscopic DVD service doesn't really count anymore) revenue stream with its own goals and global-growth prospects, just like the video service did in 2012 and beyond.
I can't wait to see this scenario play out over the next few years. As a shareholder, I expect big things from this side hustle. There will be some turbulence along the way, so you should be ready to buy Netflix on the dips.
