Netflix Inc. is accelerating its push into video games amid mounting pressure to alleviate subscriber losses.
The company is building its first internal video game studio in Helsinki to develop games for its nascent offering, which allows subscribers to download and play games on mobile phones. The catalog currently includes 32 titles and is set to grow to 50 games by the end of the year.
While Netflix's piecemeal approach to expanding its presence in the gaming industry could prove to be more successful than other Big Tech firms' approach to the market, analysts caution that the endeavor could still prove to be an uphill battle.
"While Netflix's executives have been very vocal about being invested in gaming, I'm pretty skeptical about the company's potential success, seeing as how this is a very crowded marketplace that has been very brutal to newcomers," said Michael Goodman, director of media strategies at Strategy Analytics.
Retaining subscribers
Netflix's deepening foray into gaming comes as the company's core video streaming business faces a particularly rough year. After experiencing its first subscriber decline in more than a decade in the first quarter, the company lost about a million additional subscribers in the following quarter.
"Netflix is in dire need of a new strategy to recoup its losses as increasing pricing is not a viable strategy anymore, given that they are already at the top end of what most consumers are willing to pay," Goodman said.
Netflix's shares plunge 60% in 2022 on subscriber losses, making it one of the worst performers in the tech-heavy Nasdaq index. The company's stock closed at $602.44 on Dec. 31, 2021, compared to the closing price of $239.71 on Sept. 29.
Netflix is looking to reenergize growth by launching ad-supported tiers to its platform in early 2023. While this initiative may result in subscriber growth in the short term, it will not be viable in every market, according to Goodman.
"Advertising dollars are by no means guaranteed in every country Netflix is available in, so they need more ways to stand out from the competition and maintain growth in the process," Goodman said. "One of the levers Netflix could pull to maintain the value of the higher-priced tiers is to provide games at no additional cost, but charge extra for the less expensive tiers."
In the long run, gaming is an area that would aid Netflix more in subscriber retention, said Jamie Lumley, sector analyst at market research firm Third Bridge.
"Offering a growing library of games may keep some subscribers interested enough to renew their subscriptions, but may not necessarily draw new ones in," said Lumley.
However, the company has a long way to go to make its current offering stand out. According to data by app analytics company Apptopia, Netflix's games have been downloaded 30 million times globally. This implies that fewer than 1% of the company's subscriber base of about 221 million have tried the offered games.
"These are pretty small numbers, and in terms of what that looks like on the impact to the balance sheet, it's basically a rounding error," Lumley said.
Gaming M&A
The addition of the new in-house studio in Helsinki will bring Netflix's total number of gaming studios up to four. The company acquired Finnish developer Next Games and Texas-based studio Boss Fight Entertainment in March following the acquisition of Night School Studio in September 2021.
Going from buying smaller mobile-focused developers to developing their own games internally shows Netflix's evolution of ambition, said Neil Barbour, an analyst at Kagan, a media research group within S&P Global Market Intelligence.
"There can be success in growing your own games internally instead of outright buying your own studio, which can present its own set of problems," Barbour said. "In fact, having premium content that people can't get anywhere else or haven't even seen before is probably the best path to building an audience from scratch."
However, the time it takes to deliver a game could span many years, so if Netflix continues at its current pace, the benefits of gaming for the company's broader market share may take a while to materialize, Barbour said.
"There are still companies comparable to the size of Activision Blizzard and ZeniMax that they could make a play for to accelerate their presence in the space. But there is increased regulatory scrutiny over tech acquisitions in general as well as recessionary pressures that could prevent an acquisition of that scale," Barbour said.
Moreover, Netflix has had to tighten its belt considerably following the first two quarters of the year, so it would be surprising to see the company make any expensive acquisitions at this time, said Third Bridge's Lumley.
"Netflix is likely going to be quite wary about making too big of a splash in terms of paying large amounts for a huge game developer," Lumley said. "However, if they did make a big acquisition, that certainly would be a clear signal that they want to build an offering that won't just be a small add-on feature, but perhaps a much more ambitious strategy to increase their subscriber count."
Cloud streaming
Netflix could also be looking to expand its gaming venture to the cloud. Recent job listings by the company have suggested it is seeking to fill positions associated with cloud gaming, which involves streaming games off the internet instead of outright downloading them.
A Netflix spokesperson declined to confirm whether the company was looking to expand into cloud gaming.
The cloud gaming space includes major players such as Microsoft Corp.'s Game Pass, Sony Group Corp.'s PlayStation Plus and NVIDIA Corp.'s GeForce Now. These services are becoming increasingly popular as they allow consumers to access games on a variety of devices without having to purchase expensive hardware. Kagan expects cloud gaming revenue to grow 26% in 2022 to $3.44 billion.
However, the space has proven to be difficult for some to penetrate. Alphabet Inc. is shutting down its Stadia service, as it failed to attract enough interest from gamers after nearly three years since it launched. According to Kagan, the service peaked at 2.6 million subscribers in 2021.
"While Netflix does have the infrastructure set up to stream video as well as an existing consumer base, there is a pretty deep chasm between video streaming and game streaming," Barbour said. "Microsoft and Nvidia have been working for years at this and are just now approaching usable experiences for the average consumer."
However, Lumley said Netflix may have one advantage that a player like Alphabet does not necessarily have: the potential to monetize IP.
"Netflix has its own original content and franchises that could be adapted into good games," Lumley said. "Disney has managed to turn a lot of its franchises into successful gaming partnerships, and Netflix has many similar monetizable opportunities in the space."