Netflix and games

Costly dead-end or bold diversification?

Analyst briefing

Netflix now describes video games as one of its three core media offerings alongside movies and TV series and has ambitions to be a games market leader. That’s a pretty bold statement from the streaming giant that’s changed film and TV forever but is still only a minnow in games. Does it have the potential to succeed, or will it follow so many other major media/tech companies whose hubris and strategic misjudgements led them into expensive videogame car crashes?

Our analysts, veterans of advising big media companies about games strategy over 27 years, take a deep dive into Netflix’s approach, challenges and prospects. Note: this is not equity research.

Video Games – A New Hope?

Netflix’s concerted diversification into games over the last few years appears to have originated in the perceived threat posed by gaming’s global and growing popularity to its streaming media audience and engagement numbers. In 2019 CEO Reed Hastings referenced Fortnite as its one of its biggest competitors for “entertainment time”, clearly putting gaming in Netflix’s crosshairs. Covid and its related lockdowns solidified this view as games boomed in users, audience share and revenue. This appears to have also led to the decision that ‘if you cannot beat them, you should join them’, judging by their hire of games industry veteran Mike Verdu in 2021 (as VP of Game Development) and a massive ramp up in investment in gaming initiatives. Games is now seen as one of Netflix’s three core media offerings alongside movies and TV series. Since Netflix already had a games strategy some 7 years in the making at that point, we’ll call the post-Verdu era Netflix’s Games Strategy Phase 2.

Before assessing this new strategy, it’s worth quickly assessing the Phase 1 strategy because its impact on Netflix’s current approach to gaming is often overlooked when Netflix’s new games ambitions are being assessed.

Limited success in Phase 1

Netflix’s original games strategy revolved around 2 key lines of attack: interactive TV shows and commissioned mobile and web games designed mainly as promotional tools.

Netflix’s streaming media platform should be a great platform for choose-your-own-adventure interactive TV, due to its global network of vast data centres and big audiences. That does not necessarily make interactive TV a good content investment choice. Interactivity for these hybrid TV games is limited due to the pre-recorded nature of the content (unlike video games’ procedurally and dynamically generated content), a clunky control scheme that relies on TV / Set Top Box remote controls and the inherent latency between this control scheme and the platform’s bandwidth-prioritising network topology. So far, this has restricted the many different potential types of interactive TV content to some frustratingly simple multiple-choice games and not much more. It is telling to note that despite the hype and huge media interest in 2018’s Bandersnatch interactive Black Mirror episode, it did not result in the birth of a new mainstream audience genre. After that faltering foray into multi-linear narrative TV, Netflix’s interactive TV content creation has largely been relegated to young children’s content (where users are less discerning of quality).

Netflix has arguably already notched up one strategic dead end and there may be potential for more to be done with interactive TV, especially now it has more experienced games specialists in-house. However, it is unclear whether this content format falls under the new games team’s remit so we’re not holding our breaths.

The other line of attack to Netflix’s Phase 1 games strategy lay in mobile and web gaming with titles like OITNB: Red vs Vee and Netflix Infinite Runner. With no monetisation to speak of, apparently tiny budgets and little quality control, Netflix’s original mobile/web games strategy had little potential to succeed. It’s a well-trodden path for linear media companies, who have fallen into this trap many times, usually driven (or worse, underfunded) by the marketing departments fixated on perceived demographic cross-overs with gaming audiences.

We’ve advised a lot of major IP owning non-games media companies on their games strategies over the years and have seen this “games as a marketing tick box” afterthought strategy all too often. It rarely works well. We also know plenty of work-for-hire games developers who provide development services to such companies and who begrudgingly accept these projects that are destined to disappear quickly. Privately they lament their clients’ frequent unwillingness to listen to their warnings based on experience of the games business. This approach by Netflix resulted in mobile and web games that achieved comparatively minimal downloads/plays and publicity (despite being completely free to access), were usually poorly reviewed by players too and, ultimately, made no commercial sense. All of these Phase 1 games have now been either withdrawn or, in a few cases, relaunched as part of the Phase 2 strategy.

The problem is that this original, flawed two-pronged Phase 1 strategy has simply been adapted by Netflix to form the basis of a new two-pronged Phase 2 strategy, one that it has spent the last year or so pouring money into. So let’s dive into it…

Full report: $499