Having started life as a DVD rental operation, Netflix (NFLX 1.37%) ostensibly kick-started the streaming industry in 2007 when it began delivering movies and TV shows to subscribers via the internet. Now, with approximately 223 million global customers, Netflix is the most dominant subscription video-on-demand (SVOD) company in the world.

Fifteen years is a long time in the SVOD space, and Netflix now has many well-funded rivals, including media giant Walt Disney (DIS -0.27%). By some projections, Walt Disney's Disney+ will overtake Netflix's subscriber numbers by the end of 2025.

Still, Netflix is not sitting idly by, and as many investors have observed, the company is making bold moves to position itself at the center of the next great streaming revolution.

A lack of product diversity

Netflix might have benefited from its first-mover advantage in the streaming space, but that doesn't mean it's invulnerable in other areas. Unlike many of its rivals, Netflix has few ancillary businesses. Where Walt Disney has theme parks and Warner Bros. Discovery (WBD 0.27%) has a linear TV division, Netflix earns the lion's share of its income from streaming. Netflix does, of course, still operate a DVD unit, but that accounted for just $200 million of the almost $30 billion it generated in 2021.

Fortunately for shareholders, Netflix seems to understand the need to diversify, and so the company has opted to do that by getting into the video game arena.

A bet on the future

According to Statista, the global video-on-demand market hit 1.8 billion users in 2021. By contrast, the data company counted 3.2 billion gamers over the same period.

Starting in September 2021, Netflix began purchasing mobile games studios. To date, the streamer has a half-dozen companies, including Night School Studio, maker of the popular Oxenfree.

Netflix has initially focused on iOS and Android titles, making them exclusively available to its streaming customers. And despite that it's published more than 30 titles so far, it seems the company is yet to make much of an impact. According to a study earlier this year, less than 1% of Netflix customers actively engage with its mobile games.

Part of Netflix's challenge is that, unlike its foray into SVOD, gaming is a mature market. The industry is dominated by the likes of Microsoft (MSFT 0.09%), Sony (SONY -0.46%), and Nintendo (NTDOY -0.57%), which collectively generated over $56 billion last year.

Netflix, however, seems to think there is room for it to innovate -- particularly when it comes to cloud gaming.

Game streaming as a strategy

Cloud gaming delivers high-quality video game experiences over an internet connection, allowing players to enjoy their favorite titles without the need for a dedicated console.

As a concept, cloud gaming has been around for more than 20 years, with companies such as Gaikai and OnLive serving as pioneers of the technology. Nonetheless, input latency problems dogged those early efforts, and with consoles and PC gaming never going out of fashion, questions remained whether cloud gaming is actually just a solution in search of a problem.

More recently, Microsoft, Amazon (AMZN -0.91%), and Alphabet's (GOOGL 0.79%) Google have gotten into cloud gaming with Xbox Cloud Gaming, Luna, and Stadia, respectively. Although all are currently in operation, there are caveats: Xbox Cloud Gaming is still in beta, Amazon's Luna reportedly counts users in the hundreds of thousands, and Google Stadia is shutting down in January 2023 -- ostensibly because it has failed to reach economic viability.

Despite all of this, Netflix seemingly believes it has what it takes to make console-free gaming work. Speaking at the TechCrunch Disrupt conference in October 2022, Mike Verdu, Netflix's vice president of game development, said the company is "seriously exploring a cloud gaming offering."

The executive noted that, rather than trying to build a stand-alone product, Netflix would approach cloud gaming as it has its mobile titles -- offering them as a "value add" for subscribers of its SVOD service. "We're not asking you to subscribe as a console replacement," Verdu said. "The hope is over time that it just becomes this very natural way to play games wherever you are."

Investors may have their doubts. After all, if Google failed in cloud gaming, how could Netflix succeed?

"We'll approach this the same way as we did with mobile," Verdu said. "Start small, be humble, be thoughtful -- but it is a step we think we should take."

For stakeholders, watching Netflix take a swing at cloud gaming may be unnerving. But if the company gets it right, then -- just as they moved into SVOD a decade-and-a-half ago -- they could become market leaders in the next phase of streaming entertainment.