Increasing competition in the streaming market has led several companies to diversify their offerings. Netflix (NFLX 9.71%) has done this by moving into games with its launch of Netflix Games in November 2021.
While Netflix is taking a step in the right direction by offering additional services, the company may have bitten off more than it can chew with its gaming service. Here's what Netflix needs to succeed in the incredibly competitive world of gaming.
Name recognition is key
Netflix announced that it lost 200,000 subscribers in Q1 2022. The disappointment led to a complete shift in priorities for the company, resulting in content cancellations, a recently announced ad-supported tier, and a larger focus on games. The last has resulted in Netflix acquiring three game developers in less than a year: Boss Fight Entertainment, Night School, and Next Games. These studios' output varies considerably, from popular mobile games to acclaimed indie titles to tie-ins with familiar franchises such as The Walking Dead.
Netflix's head of external games, Leanne Loombe, said at the Tribeca Film Festival on June 13 that the company is "intentionally keeping things a little bit quiet [about Netflix Games] because we're still learning and experimenting." Loombe added that Netflix wants to "make sure that games are a really valuable part of our members' subscription."
So far, Netflix offers 23 games. Titles such as Queen's Gambit Chess and Stranger Things 1984 show Netflix is attempting to entice players with tie-ins to its popular content. However, this method makes the hefty assumption that fans of these series are also at least partially interested in playing games.
Meanwhile, streaming rival Apple (AAPL +2.65%) has steadily increased its services business, introducing Apple Arcade in September 2019, and similarly allowing consumers to use the game service ad-free alongside other offerings such as Apple TV+.
Rather than focus its gaming content on its streaming originals like Netflix, Apple has gone straight to the source by offering subscribers mobile titles from popular gaming brands. Apple Arcade currently offers games from well-known franchises such as LEGO, PAC-MAN, Sonic, Cooking Mama, and more. Apple's approach increases the odds that its players are already fans of games, increasing the odds of subscriber retention. The approach seems to be paying off: J.P Morgan has estimated that by 2025, Apple Arcade will see revenue increase 14% to $1.2 billion a year.
NASDAQ: NFLX
Key Data Points
The Stranger Things of games
Gaming is a notoriously difficult and competitive industry to enter. If Netflix Games is going to help attract and retain subscribers, Netflix will need to offer hit games on the level of its mega-popular series Stranger Things, which racked up a record-breaking 286.79 million viewing hours in the first weekend of its latest season.
Microsoft (MSFT +0.60%) launched its subscription-based game service Xbox Game Pass in 2017, which has become an industry model for game subscription services, bringing in more than $3 billion a year. It is home to several Xbox exclusives, with one of its biggest draws being the Halo series. By purchasing popular developers such as The Elder Scrolls and Fallout developer Bethesda Softworks, Microsoft has given Game Pass subscribers access to a library of major franchises for the low price of $9.99/month.
Netflix built streaming from nothing and has experience breaking down barriers. It is possible that the company has a foolproof strategy for its venture into gaming. But while Netflix was the first in streaming, it's now trying to break into a decades-old, well-established industry filled with fierce competitors.
Previous companies with even more financial firepower have tried and failed. Google (GOOGL +1.68%), whose parent company is 18 times larger than Netflix, launching its subscription-based cloud gaming service, Stadia, in November 2019. That same month, Stadia captured just 2.4% of the player base for Destiny 2, one of the biggest and most played games across consoles and PCs. Stadia's share then decreased to 0.08% in 2022, as the company struggled to compete with established companies like Microsoft and Sony. Netflix Games will need to convince subscribers its platform is worth choosing over competitors.
NASDAQ: MSFT
Key Data Points
The future of Netflix Games
Game-to-film adaptations are a current trend among nearly all streaming platforms. Netflix previously had success with its adapted series The Witcher and has announced several other game-to-TV adaptations in development based on Resident Evil, Assassin's Creed, and Cyberpunk.
If Netflix can work with the studios behind these games to tie an adapted series' release to a mobile game within the same franchise, the company would be in a better position to connect Netflix Games with the kind of diehard gamers who are more likely to stay subscribed for the long haul.
Streaming service investors should keep an eye on Netflix's future game developer acquisitions. Studios home to popular game franchises will be worth their weight in gold for Netflix, since the company can use their intellectual property to further entice more players and subscribers.
