The streaming industry experienced exponential growth over the worst months of the COVID-19 pandemic, with global subscriber numbers passing 1 billion in 2020. But with the space now experiencing a cooling rate of sign-ups, subscription video-on-demand (SVOD) could be hitting a plateau. In fact, according to one industry study, 82% of SVOD customers plan to maintain their current streaming accounts without adding any more in the near term.
The maturing of the streaming space is a notable risk for Netflix (NFLX +0.71%), which is already one of the world's largest SVOD operators by subscriber numbers. But when looking at how the company might develop over the next five years, the story isn't just about video streaming services anymore. Netflix is expanding into the videogame arena, creating the potential to reach new audiences, while also creating an opportunity to defend itself against customer churn.
Of course, the video game industry is another well-established space that's populated by big players like Microsoft, Sony, and Nintendo, and investors may question how Netflix can successfully leverage gaming to maintain growth over the coming years. With that said, here's a closer look at why Netflix's videogame division might play a larger role in its growth over the next five years.
Netflix's baked-in audience
One of Netflix's biggest strengths in the video game arena is its sheer volume of customers. With over 223 million subscribers, the company is entering the space with a massive potential user base to not only pitch its titles to, but to also learn from.
The streamer's initial foray into the space has reportedly been somewhat underwhelming, but over a longer timeline, it will have plenty of opportunities to refine its output and to work out just what gamers want.
Another advantage Netflix has is its bank of intellectual property. Originals such as Stranger Things and Squid Game have generated billions of hours of viewing time, representing a large base of consumers to which it can market tie-in games.
Already, Netflix has rolled out several Stranger Things titles, and it is working on games inspired by Money Heist and The Queen's Gambit. Such offerings have the potential to not only appeal to existing subscribers, but to also entice keen players to sign up to the streaming platform.
NASDAQ: NFLX
Key Data Points
Expanding revenue streams
While Netflix's games are currently free to all customers, in the future the company could opt to restrict such access for its lower-cost tiers. The streamer prevents users on its lowest-cost plan from downloading content for offline viewing, and those who want ultra-HD (4K) playback must pay for Netflix Premium.
The move into gaming also provides Netflix the opportunity to eventually open up other revenue streams, including in-game purchases (IAPs). According to some estimates, 79% of mobile games include IAPs, and this monetization method accounts for more than 48% of earnings for such games. The popularity of IAPs has allowed free-to-play titles such as Epic Games' Fortnite to reach millions of players while also generating billions of dollars annually.
Ambitions could surpass reach
Another area of gaming that Netflix is showing interest in is cloud gaming. For the uninitiated, cloud gaming streams titles over a broadband connection to a device such as a TV or smartphone.
Speaking at TechCrunch Disrupt in October 2022, Netflix's vice president for gaming, Mike Verdu, said the company was "seriously exploring a cloud gaming offering."
From a distance, Netflix getting into cloud gaming sounds like a reasonable plan. The company very much pioneered the concept of streaming data-intensive content over the internet. But unlike video content, cloud gaming is not a passive experience -- gamers' control-pad or keyboard actions have to be piped back to servers pretty quickly, otherwise the input lag can make for a miserable experience.
Over the years, several companies have tried and failed in the cloud gaming space; from the collapse of OnLive to the shutdown of Alphabet's Google Stadia, the promise of a truly great cloud gaming experience is yet to be realized. Netflix could well be the company to make that happen (again, it pretty much kick-started the video streaming world we all take for granted today), but the risk of failure can't be overstated.
Long-term prospects
While Netflix faces many challenges in building out a competitive (and profitable) gaming business, the potential revenue it could bring in is something that investors should be conscious of. This year alone the video game market is slated to be worth $221 billion, making it more than twice as valuable as the SVOD industry over the same period.
Investors considering the long-term potential as Netflix makes inroads into gaming can take some signals from the company's track record to date. It has a history of getting into new arenas (it started out as a DVD rental business) and of releasing regular content people love. If it can replicate that success with video games, then the stock's price will surely reflect it.
