Digital media giant Netflix (NFLX 2.83%) is building an impressive portfolio of video games, but the gaming has been restricted to Android and iOS smartphones so far. That is changing now, as Netflix is testing a couple of game titles on a wider selection of devices.
The initial test run is limited to a handpicked list of users in Canada and the U.K., so this isn't a game-changing move quite yet. However, the details of this experiment tell me a lot about Netflix's long-term gaming ambitions -- and I'm getting excited about it.
I think we're looking at the early days of a real business here.
What is Netflix testing in the video game service?
Mike Verdu, the VP of Netflix's video game department, announced a "limited beta test" of games running on a wider selection of devices.
- This experiment starts with "a small number of members" in the American and Canadian markets who access Netflix through an undisclosed list of smart TV models.
- The same markets, and perhaps the same beta testers, will be able to play the games on PC and Mac computers over the next couple of weeks.
- There are only two game titles in this initial test: the Oxenfree supernatural thriller adventure from Night School Studios and Molehew's Mining Adventure, which is an in-house development and presumably similar to the popular Bejeweled or Candy Crush experiences. Oxenfree is an established classic while the gem-mining game only has a copyright registration to its name -- no separate announcement, no reviews, no video trailers.
- Beta testers won't control these games with their remote controls. Instead, the smart TV versions will require an app named "Netflix Game Controller," available in Apple's (AAPL 1.84%) App Store and Android's Play Store.
Netflix listed several brands of compatible hardware platforms, including several Android-powered systems, Amazon's Fire TV players, and Roku devices.
Apple TV was conspicuous by its absence from this pre-vetted list. It wouldn't surprise me if Cupertino is playing hardball with a prospective gaming service rival by keeping Netflix's early attempts out of the App Store -- but then again, the related Netflix Game Controller is available to iPhone and iPad users. Oh, to be a fly on the wall by the Cupertino and Los Gatos negotiating tables.
Anyway, Verdu's statement also makes it clear that this is an early test of a much larger ambition.
"Today, we're taking the first step in making games playable on every device where our members enjoy Netflix -- TVs, computers, and mobile," the announcement said. "By making games available on more devices, we hope to make games even easier to play for our members around the world."
What's the big idea?
These games don't run on the device in your hand, on your desktop, or in your living room's entertainment center. We're talking about streaming games, where the gameplay is handled by computers in Netflix's server rooms, on a cloud-computing platform, or perhaps by edge-computing hardware in a nearby network hub. Your web browser or Game Controller app will send your controller commands to that offsite processing hardware, receiving a real-time video stream in return.
This isn't a new idea, mind you. Amazon, Sony, Nvidia, and Microsoft (MSFT 1.26%) all offer similar services right now. Alphabet (GOOG 0.80%) (GOOGL 0.86%) has already tried its hand at cloud gaming for a couple of years and then shut down the Stadia service. The company was confident in its technical platform but Stadia never reached a sustainable level of gamer interest.
Still, this is a deceptively big step forward for Netflix, whose growing catalog of video games has been running exclusively on iOS and Android devices until now. The company is putting serious money and effort into its gaming ambition, so making the titles available on a wider range of devices is only natural. In fact, one could argue that any TV, computer, or gadget that is capable of streaming Netflix videos should be able to handle a cloud-based gaming service, too.
Can Netflix turn this gaming side gig into a big business?
Today's beta test will be tomorrow's free-to-video-subscribers bonus feature. Beyond that, I expect another Qwikster-like separation between the existing video service and the new gaming platform. After that, you should be able to pay for the service you want and perhaps get a small discount for bundling both plans under one account.
The similarity between this video game idea and the early days of digital video-streaming is downright uncanny.
What we know as the main Netflix service today was once a free add-on for DVD-by-mail subscribers. In 2011, when the digital version was presented as a separate subscription service, Netflix's stock took a deep dive as critics doubted the long-term value of this unproven idea.
Now, the DVD-mailing business will ship its last disc next month while the streaming solution serves 238 million paying members around the world. Netflix collected $2.2 billion in top-line revenues in 2010, generating $118 million of free cash flows. The promising but puny results of the DVD-mailer era have ballooned into sales of $31.6 billion and free cash flows of $1.6 billion over the last four quarters. The business split may have looked silly at the time, but it turned out to be a game-changing driver or shareholder value in the long term.
I'm not saying that video games will take over as Netflix's chief line of business any time soon, but I expect this operation to add a healthy revenue stream in the next couple of years. The beta tests and scrawny title collection you see so far are just baby steps in that inescapable direction.
Netflix knows how to make an entrance, and I can't wait to see its full-fledged entrance into the gaming sector. In the meantime, I like where the company is going and the stock looks like a solid buy these days.