Netflix must overcome past Big Tech mistakes to make it in gaming – analysts

Although Netflix Inc.'s expansion into video games faces substantial obstacles, analysts said the company should glean lessons from past failures by other Big Tech players as it attempts to chart a more sustainable path forward.

A week after hiring former Electronic Arts Inc. and Oculus executive Mike Verdu, Netflix confirmed that it will start offering games in its existing subscription plans at no extra cost. The company provided few details about the initiative, except for comments from Netflix COO Greg Peters, who said it will be a multiyear effort that would start "relatively small" and initially focus on mobile games.

With this new initiative, Netflix enters a turbulent market that Big Tech companies including Amazon.com Inc. and Alphabet Inc. have failed to dominate despite some well-funded efforts. However, Netflix's strategy to approach gaming at a smaller scale initially may allow the company to carve a more stable path to building a userbase than its larger competitors' ambitious efforts, according to analysts.

The value-add potential

Netflix's earliest forays into gaming came via partnerships and "choose-your-own-adventure" interactive specials, including Minecraft: Story Mode, based on Microsoft Corp.'s popular game franchise. The company also collaborated with indie video game studio BonusXP to develop and publish games based on Netflix shows "Stranger Things" and "The Dark Crystal: Age of Resistance."

As it leans further into gaming, Netflix COO Peters said the company's first mobile games will focus on Netflix's existing intellectual property, but the company eventually plans to expand include third-party content licensing.

Analysts said the company's decision to offer the service through its current subscription allows it to build out a user base and create value in the service before potentially adding more monetization opportunities.

"Netflix is ... taking a page out of Amazon's book by adding more value to the base offering," said Michael Goodman, director of digital media strategies at Strategy Analytics. "Amazon Prime is a very strong product because subscribers get access to a growing number of benefits. Offering mobile games is a nice, cost-effective way to drum up business and potentially set up a new revenue stream in the future."

If Netflix manages to build up a significant userbase for its games, the company can then choose to expand it into a separate subscription tier or a different service altogether, Goodman added.

Ian Hughes, a senior analyst for the internet of things practice at S&P Global Market Intelligence's 451 Research unit, also noted the potential for the gaming service to add to Netflix's extensive data set on its users' behavior.

"They will also be able to track all the user data, including which people are spending more time watching shows and which are mostly playing games," Hughes said.

Big Tech's gaming woes

Netflix will join other members in its so-called FAANG stock group that have been dabbling in gaming, including Facebook Inc., Amazon, Apple Inc. and Google LLC. However, many of those earlier ventures failed despite the companies' deep pockets and significant resources.

Amazon's gaming unit, Amazon Games, canceled or discontinued at least five games in recent years, including an online multiplayer game based on "The Lord of the Rings." The division's last title, Crucible, received such a negative reception from players and critics that the company decided to discontinue it. Meanwhile, Google's internal game studio, intended to feed content into Google's Stadia cloud-gaming service, wound up shuttering less than two years after launch.

Joost van Dreunen, the co-founder and former CEO of gaming research firm SuperData Research, said the market is increasingly hostile toward tech firms' entry into games.

"What Amazon and Google have offered so far lacks personality and creative vision, and you can't blame consumers to be disinterested when all you've done is offer them a half-hearted effort," van Dreunen said. "Amazon and Google should serve as a warning for any newly-minted Netflix exec thinking it will be easy for a big tech firm to penetrate the games industry."

Van Dreunen also noted that Netflix will face significant competition from Microsoft, which has already claimed the moniker the "Netflix of gaming" for its Game Pass subscription service.

"If Netflix insists on entering games as a publisher, then perhaps the most effective way to do so is by operating as a venture capital fund," van Dreunen said. "By providing capital to promising studios and creative talent, Netflix could take a position in mobile and drive traffic, and revenue, from its video app, and vice versa."

The mobile approach

Goodman said Netflix's mobile-first approach to gaming could help it launch on more solid footing than some of tech's past gaming failures, given differences in content development and acquisition costs for mobile versus console and PC games.

"Netflix is going for a lower-cost alternative, which also has the added benefit of less competition," Goodman said. "Apple Arcade is the only notable mobile game subscription service out there, but Netflix will still be unique in the market for not charging extra."

Still, Wedbush analyst Michael Pachter noted that many content companies have a dubious track record with mobile gaming.

"The business graveyard is littered with the corpses of content companies that have failed at making mobile games, with Disney the most prominent failure," Pachter said, adding that big video game publishers such as Activision Blizzard Inc., EA and Take-Two Interactive Software Inc. only had lasting success in the sector through acquisition.

The technical requirements of streaming video and streaming games are also quite different, said 451's Hughes. Even though Netflix is in the streaming business, Hughes expects the company will offer its games through downloads and not streaming.

"Netflix would need an entirely different infrastructure to pull off cloud game streaming, including full machines that are capable of smoothly running the games and transmitting them to users' devices over the cloud," Hughes said. "This could turn out to be very costly for the company."

Netflix has not confirmed whether subscribers will need to download the new mobile games onto their devices, like Apple Arcade, or if they will be streamed off the cloud, like Game Pass or Stadia. The company did not respond to S&P Global Market Intelligence's request for more detail on its plans.