Netflix (NFLX -0.51%) has become synonymous with subscription video-on-demand -- a notable feat for a company that started its life as a DVD-by-mail rental service. But now it is in the midst of another metamorphosis as it expands its video game creation and distribution arm.
Netflix recently revealed it was building a cloud gaming platform, promising to deliver its titles across an array of connected devices. With Netflix getting into the game streaming market, there is certainly lots for investors to be excited about. However, the nascent space is unproven, and one big-name tech company that attempted to make a go of such a service has already given up. With this in mind, does this effort mean that now would be a good time to pick up shares of Netflix, or is its video game adventure simply too much of a risk?
The risk of being a one-trick pony
Netflix first moved into video streaming in November 2007, which also happened to be the first year that the company passed more than $1 billion in annual revenue. In 2022, Netflix's income topped $31.5 billion, underscoring the success of its streaming operation. However, unlike many of its major streaming video rivals, Netflix does not have a diverse business model. It has no TV or cable networks, no theme parks, and though it operates a handful of movie theaters, they typically showcase its streaming content.
This lack of diversification has proven problematic for Netflix. In 2022, the streamer's customer count declined in consecutive quarters, leading to a significant plunge in its share price. By contrast, when Walt Disney shed a net 2.4 million Disney+ subscribers in its fiscal 2023 first quarter, its stock price climbed because its theme parks business continued to do well.
A less-than-stellar entry introduction to the industry
Netflix took its first steps into the video game arena in November 2021 with the launch of dozens of iOS and Android titles, which it pitched as exclusives for its subscribers. At the time, the company spoke of its excitement about the "journey" it was on. Customers, it seems, were much less enthused. According to data made public last summer by analytics company Apptopia, fewer than 1% of Netflix subscribers were accessing any of its games on an average day.
Despite the poor performance of its gaming segment so far, Netflix remains fully committed to it. Co-CEO Ted Sarandos stated during the streamer's 2022 Q3 investor call that the company "thinks that the future of television, of films, and gaming is streaming." And Netflix is not the only company to have recognized the potential of streaming video games.
Big names making small dents
Microsoft (MSFT -1.84%) introduced its cloud gaming service -- dubbed Xbox Game Pass Ultimate -- in September 2020. Priced at $14.99 a month, that platform lets users play high-end games in real time without first having to download them to a device. In October 2022, Microsoft revealed that 20 million players were using its cloud gaming service, though parsing just how many are paying for subscriptions is unclear because some titles are exempt from the subscription charge.
Alphabet also got into the cloud gaming space a few years back with the launch of Stadia -- a freemium platform backed by a smattering of well-known developers including Ubisoft Entertainment and Electronic Arts. However, Alphabet shut down Stadia in January, ostensibly because the service had not attracted a significant number of users. According to one study, Stadia had less than 5% of the cloud gaming market in 2022, while Microsoft commanded as much as 70%.
Opportunities ahead
While Microsoft has (so far) had the better run in the cloud gaming world, it's worth noting that 20 million users -- paid or otherwise -- is still a tiny fraction of the more than 3 billion people who enjoy video games annually. And though some investors may see Netflix's entry into the sector as striking at the right time, others may feel that streaming games are likely to always be a niche market -- particularly considering that input latency is a huge concern for dedicated gamers.
Nonetheless, Netflix seemingly believes it has something to contribute when it comes to video gaming. And considering the global industry is expected to be worth $372 billion in 2023,stakeholders may well be keen to see just what that streaming giant can do.
Netflix is scheduled to reveal its first-quarter results on April 17. It will be interesting to see just what the company has to say about its video game ambitions. Management revealed the company is still "very early" in the journey, and so it remains to be seen if it's ready to discuss those plans in notable detail. After all, Netflix rewarded investors by moving early into a new field once before, and it's possible it could do the same again.
