Part 2: How Netflix could become the 'Netflix of Gaming'

Written by Ethan Levy, who is always looking for worthy, free-to-play mobile games for the N3TWORK Scale Platform. Ask him about a free, $10,000 UA test for your game. Thoughts and opinions are his own and do not express those of his employer.

Last month, I speculated on the rumors of Netflix’s impending push into gaming, guessing at what strategy they would take and laying out the strategy I thought would be most profitable. What a difference a month makes! In that time, Netflix has hired longtime industry executive Mike Verdu, released official details about their gaming initiative in their quarterly Shareholder Letter and expanded on those details during their Investor Call. Compared to last month - when we had rumors and scant details to theorize on - we are starting to see the outline of Netflix’s gaming strategy.

This week, I am going to try and decode the portents hidden within the tea leaves of the Netflix’s public statements and guess at what the future holds for Netflix gaming.

Mike Verdu is a great hire

I have never worked with Mike Verdu, or even spoken with him. But any time I’ve heard his name from people who have worked closely with him, it is in a positive light. Between executive stints at Atari, EA, Zynga, Kabam and Oculus, he has a long and impressive CV that runs the gamut of platforms, genres and business models. On paper and from his reputation, Mike is a fantastic hire to lead the charge on gaming for Netflix, and shows they are serious about the gaming business.

Netflix games are part of the core subscription offering

First, in the shareholder letter, Netflix makes it clear that they “view gaming as another new content category… games will be included in members’ Netflix subscription at no additional cost similar to films and series.” During the investor call, when asked if gaming or other new business lines (like podcasts) will be a meaningful profit pool.

“Video gaming… think of that as making the core service better. So lots of investment but not a separate profit pool. It's enhancing the big service that we have... Netflix is a one product company with a bunch of supporting elements that help that product be an incredible satisfaction for consumers and a monetizing engine for investors.”

CEO Reed Hastings on role of gaming in company profit pool 

“Netflix is “really thinking about this as a core part of our subscription offering. And so we measure it very much like we do around the success of adding incremental movies or adding incremental series, which is that, ultimately, those are about being compelling to members, having them engage and talk about it, and having that be part of the social conversation that's out there. We see those benefits in retention. Obviously, if we are delivering more value there, then members stay with us longer.

We see those values in acquisition as well because if there's a great game that lots of people are talking about to their friends, their colleagues, their family, then that's a source of acquisition for us as well.”

COO & CPO Greg Peters on how gaming fits into the Netflix business model. 

So it's very clear that games are just a new type of media included in your Netflix subscription. Netflix is not looking to diversify revenue by building hit F2P games or creating new, licensable brands (strike one against June’s Ethan). They want to justify your subscription price, reduce subscription churn and find a new vector of watercooler moments that get people talking about Netflix to their non-subscribed friends.

Netflix games will start on mobile

Next Games has soft-launched Stranger Things: Puzzle Tales, a free-to-play story-driven puzzle adventure RPG.

Mobile will be the starting point for Netflix gaming, but we can expect to see games on other platforms as well as they experiment in the medium. From the shareholder letter “Initially, we’ll be primarily focused on games for mobile devices.” In the Q&A, Peters goes on to say “we think mobile is a great platform for games. Clearly, it's very mature. It's got great enabling technology, tools, a great developer community, and the vast majority of our members have phones that are capable of great gameplay experiences.”

They will not be limited to mobile, however. Both the investor letter and Q&A make it clear they are going to experiment with gaming in different forms and platforms over the course of many years.

Netflix is taking a long term view

The shareholder letter frames up the long term investment Netflix is planning on making into games. “Since we are nearly a decade into our push into original programming, we think the time is right to learn more about how our members value games.” Netflix made a big splash with original programming when it launched House of Cards back in 2013, and it is looking to take a similar, long term approach in gaming.

But we shouldn’t expect a similar, House of Cards style superstar opening salvo. Peters explains “this is going to be -- it's a multiyear effort. We're going to start relatively small… we'll learn. We'll grow. We'll refocus our investment based on what we see as working, and we'll just continuously improve based on what our members are telling us is working.”

We should expect to see Netflix try out a wide variety of gaming content, as Peters says further in the Q&A. “We'll be very sort of experimental and try a lot of things in this space. A lot of what we have to do right now is just focus on learning.” Overall, Netflix is presenting a grounded, humble attitude when discussing this venture into a new medium.

#1 Prediction: the endgame is a subscription price increase

Going off the rumors first reported by The Information of a “smaller Apple Arcade,” June’s Ethan predicted that Netflix was going to launch a new subscription line for gaming, a proposition destined to fail. How could you have been so stupid, June’s Ethan? We now know that these games will just be another benefit of being a subscriber.

There are two ways I can see this justifying what will ultimately be many hundreds of millions invested into building game content over the next decade. The first is what I call “spreadsheet games.” Netflix measures some combination of engagement, media reporting and social media buzz to determine if a piece of content has been profitable based on its price tag. For every Bird Box sized hit that instantly gets a sequel, you have a Jupiter’s Legacy sized dud that gets cancelled weeks after its release. The success of gaming will likely be measured by a similar set of metrics that determine if a game was a hit or not based on its development and marketing costs.

But I predict that the endgame here is to justify another $1/month increase in the subscription price down the line. Let’s imagine that Netflix invests something like $600 million into gaming over the next 3 years. If, at the end of that, there are enough must play games that Netflix feels a $1/month price increase is justified, that investment will become profitable within 3 quarters. 

#2 Prediction: mobile players will face a lot of friction

The biggest question for Netflix mobile gaming, in my opinion, is how they will deliver games to players? At least on Apple, where Facebook, Microsoft, Nvidia and others have failed to get cloud-based gaming apps onto the App Store, the policy is for each game to be a standalone app with every update reviewed and approved. So at least for half the market, you would not be able to serve games within the Netflix app. And even if you could, I wonder what this would imply for game development? I’m not an engineer, so this might be pointless conjecture, but could a single app serve up games authored in Unity and Unreal? Certainly they can be accomplished through streaming. But as executable DLC? I’m just not sure.

This is the customer experience I predict. Netflix will advertise mobile games in the mobile Netflix app by having them appear in the Home tab alongside movies and shows. Players will then be directed to a standalone app for each game they want to play, and once downloaded they will have to sign in with their Netflix account for access.

So there’s friction in creating awareness: Netflix might find that they have to deploy money in advertising to attract downloads. There’s friction in access: you need to download a separate app. There’s friction in getting a player to open the game: a Netflix game is just another icon sitting next to the other 40+ free, premium and Apple Arcade games I have on my phone, most of which go unplayed. 

Playing Netflix games will not be as seamless as watching Netflix shows. As such, I expect they’ll have a harder time meeting their engagement targets than expected. 

#3 Prediction: Netflix will face more competition for developers than they anticipate

In the Q&A, Peters says “we also feel that our subscription model yields some opportunities to focus on a set of game experiences that are currently underserved by the sort of dominant monetization models and games. We don't have to think about ads. We don't have to think about in-game purchases or other monetization. We don't have to think about per-title purchases… many game developers really like that concept and that focus and this idea of being able to put all of their creative energy into just great gameplay and not having to worry about those other considerations that they have typically had to trade off with just making compelling games.”

As a developer, I can confirm that this is an attractive proposition. But it comes with some tradeoffs. Obviously I don’t have any insight into how Netflix is structuring deals. But let’s just assume they are paying developers a guaranteed premium on their development costs, something like a 30% profit. Depending on the type of studio I was running and the game I wanted to build, a deal like this might be a godsend of guaranteed profit. But given the blockbuster profitability a hit free-to-play game can generate, this deal might be very unattractive. 

Additionally, even though there are more mobile games and more mobile game developers than ever before, there are also a lot of opportunities vying for their time. There’s direct competition from subscription services like Apple Arcade and Google Play Pass, publishing partnerships like the N3TWORK Platform, Tilting Point, Scopely and countless hypercasual publishers, self publishing, not to mention other gaming platforms. The competition for star game development talent will be high, and I do not think Netflix will have as easy of a time attracting game development talent as they have had with television and movies.

#4 Prediction: Netflix will not release player numbers

Given Netflix’s history with film and tv, we can guess that they will not reveal much information about their games performance to the public, or even to their game developers. Outside of success metrics for any hits they produce, I don’t think we’ll know a lot about how many players are engaging with Netflix games.

Conclusion: 🤷

Will Netflix games be a successful expansion for Netflix’s investors? Who knows. Netflix has the time, money and patience to invest in games for years and an ambiguous success criteria. No matter what we see when the first Netflix games hit the market, we shouldn’t rush to judgement (except, of course, in the case of a runaway hit). If my endgame prediction of justifying a $1/month price increase is accurate, there’s almost no way this venture could fail, as Netflix has increased subscription prices plenty of times in the past with limited downside. All I know is that as a gamedev, any venture that helps employ more colleagues and allows creative people to take more risks is a welcome one in my book.

Written by Ethan Levy, who is always looking for worthy, free-to-play mobile games for the N3TWORK Platform. Ask him about a free, $10,000 UA test for your game. Thoughts and opinions are his own and do not express those of his employer.