Netflix Games’ Second Season: Challenges, Changes, and the Path Forward
Hi! I’m Michail Katkoff and I wrote this article.
With 15 years of experience in building, operating, and scaling games and game companies, I have played key roles at top gaming companies including Rovio, Supercell, Zynga, and FunPlus. I also co-founded Savage Game Studios and led it as CEO until its acquisition by Sony.
I am the founder of Deconstructor of Fun. This passion project of mine has served game industry professionals for the past 12 years. Make sure to sign up for our weekly newsletter!
Netflix’s entry into games started with a bold announcement: the company aimed high and aspired to have the "best" video game service in the industry for 2022.
Two years later Netflix has spent a whopping 1,000 Million Dollars (in comparison, the rest of Netflix's content costs around $17B to produce annually) building a multi-hundred-person strong game development and publishing organization, acquiring half a dozen game studios, and building a catalog of over 100 games.
Without a doubt, Netflix Games’ departing leader Mike Verdu, built a solid foundation. What’s even more impressive is how this gigantic corporation was able to move so fast into a new business.
What is most impressive from my point of view is the caliber of people Mike Verdu has brought on and the culture he has built.
I know personally many of my peers working at Netflix Games and throughout the years they’ve been nothing but complimenting the working environment calling it the best company they have ever worked at. Sure, the absurdly high compensation plays a role. But it’s more about the combination of autonomy, resources to execute, and bearing full responsibility (good or bad) for the outcome.
While this analysis offers constructive criticism of the business strategy Netflix Games has pursued in its first iteration, I want to state that Mike Verdu and his leadership team, by all accounts, are world-class organization builders.
Nevertheless what was achieved doesn’t seem to meet the ultra-ambitious objectives. After all, you’d be hard-pressed to name Netflix as the best video game service in the industry today.
The lack of traction in games was addressed by Co-CEO Greg Peters in late 2023:
“This trajectory is not dissimilar from what we’ve seen before,” Netflix Co-CEO Greg Peters said on the company’s prerecorded earnings Q3/2023 call. “When we’ve launched a new region — or when we launched new genres, like unscripted” we had to “crawl, walk, run, but we see a tremendous amount of opportunity to build a long-term center value of entertainment.”
Thus last week the company announced that Mike Verdu, the person who built the Netflix Games from scratch, is moving to a new role. The company didn’t announce a successor, which often means the decision was made hastily.
“We are building a sports team, and not a family”
- Netflix quote
Continuing with the sports, not a family analogy, when a sports franchise catches a skid, the first change is switching its head coach. The new coach will make changes to the playbook and the player roster.
As the new person takes the lead of Netflix Games, we can expect them to begin tackling the three core problems the service is having while building a compelling strategy rather than continuing expensive experimentation.
Continue reading to understand Netflix Games’ three main problems and what the future holds for the service…
Netflix Games’ - The Story So Far…
While building a world-class organization and culture it seems from afar that there was no strategy, only a strong vision. This has led to a series of seemingly random reactive actions that didn’t allow Netflix Games to reach its vision.
When Netflix announced it was taking gaming seriously in 2021 the company said that “games are a strategy to keep subscribers engaged in between seasons of their favorite shows”.
Netflix’s push into gaming is part of a larger effort to plant seeds for future revenue streams to offset a potentially saturated subscriber environment.
To date, we’ve seen Netflix Games purchase exclusive publishing rights to vintage PC titles and mobile games as well as develop new games with their own IPs. They’ve stripped the games of possible microtransactions, and (re)launched them in the app stores, making the games exclusive for only Netflix subscribers.
To be absolutely frank, the massive volume of games launched feels random. While titles like Too Hot to Handle and Netflix Stories are perfect fits, core PC games like Townsmen, Terranil Hades, or Into the Breach seem off-place in the app. Not to mention that several of the PC-ported games I’ve played offer a bad user experience showing that the quality control has been overrun by the need to build out the size of the catalog.
Top 20 Netflix Games based on total downloads. During the same period of time, the Netflix app was downloaded 630M times. (source: Sensor Tower)
The growth of downloads has been steady over the last three years. Going from 2M a month to the current 8M. Then again, the number of games has increased tenfold during the same period of time. Given the past and ongoing investment, this type of slow and steady growth is likely below expectations. (source: Sensor Tower)
To date, Netflix Games's catalog has yielded a total of 326M installs. That is 3.1M installs per title on average and 1.3M installs when looking at the median. If we remove the three GTA titles out of the equation, which have been rumored to cost $50M and converted into 55M installs, an average Netflix game has been downloaded 2.7M times.
The three GTAs are by far the most downloaded games on Netflix Games. Yet Netflix didn’t bring these games onto mobile. They have been readily available in the app stores since 2012. The real winner of this deal is Take Two, who sold dormant decade-old assets to Netflix for rumored $50M.
In addition to releasing 100 games - or to be more specific, making games that have shipped years ago exclusive to Netflix subscribers - the company has acquired four game studios and established two studios from the ground up.
SpongeBob: Get Cooking is Netflix's second most downloaded game. Fun fact, this game is also Tilting Point’s most popular title. Not only is Tilting Point’s version free (to-play) but it has also been downloaded 90M times compared to 9M downloads it received under Netlifx.
Conclusion: Netflix Games paid to have a clone of an existing free game to be exclusive for their subscribers. And when they removed the microtransactions from the game, there was no uptick in popularity of this game.
Yet with interest lacking in its mobile games, Netflix Games quickly invested in other avenues.
First, they began testing new games played on a TV that will require players to use a mobile phone as a controller, accessible through the Netflix app. The results of this test weren’t marketed as a success and to be honest, it wasn’t that great of a player experience either.
Secondly, Netflix Games appeared to have started developing AAA shooter at the new studio with a former Overwatch producer. This move is questionable at best given how ultra-concentrated the PC shooter market with many top publishers like Ubisoft and SEGA failing to get traction with their new shooter franchises.
To summarize the story thus far, it seems like the focus has been on hiring top talent and giving them full autonomy to execute against the vision without a strategy to provide guard rails.
The problem is, that how you execute against a vision is up to interpretation for each individual. That is why organizations need a strategy. A strategy is a plan of action designed to achieve a long-term aim. It outlines the specific steps, actions, and resources needed to reach the vision.
Without a strategy you end up being highly reactive and seemingly random with your actions eventually failing to reach the vision - unless you become lucky with one of those random actions.
Lack of strategy leads to opportunistic behavior. Case in point, Netflix Games seemingly started a AAA shooter studio just because they were able to hire a producer of Overwatch. They justified this action with a vision of “games playable on every device our members have Netflix. Yet there’s no strategy on how they will execute again developing and publishing a AAA shooter game. Not to mention Roblox Netflix metaverse play…
Netflix Games vs. Apple Arcade
Netflix Games launched two years later than Apple Arcade with arguably a weaker offering, no direct monetization, very limited utilization of Netflix IPs, and an inferior distribution model.
Since the beginning, the similarities between Apple Arcade and Netflix Games have been palpable. After three years, it looks like Apple beat Netflix in every single category from the quality of the games down to the number of games. They’ve also likely invested significantly more capital over time and accumulated direct revenue from their work.
In many ways, Netflix Games is unfortunately a weaker version of Apple Arcade. It has arguably lower-quality games, very few original games, a smaller distribution channel, and just overall less games to choose from. And there’s also no direct monetization attributed to Netflix Games.
It is also confusing that Netflix Games took little learnings from Apple Arcade and is now on the same trajectory. Apple Arcade got its shake-up 3 years in. It leaned out and got bundled with Apple One because it focused on quantity over quality while misunderstanding what drives real engagement in games. Netflix Games is now 3-years in facing a shake-up due to the same fundamental reasons.
Netflix's Three-Body Problem for Its New Boss
Whoever takes charge of the organization is in a great position to pivot it to success. The team and culture are best-in-class. The corporation is still committed to games. The subscription base has grown and the stock is up. All of this gives the new boss time and resources to build a sound strategy and begin executing against it.
Problem #1 Product Market Fit
Netflix Games is not working. Among Netflix's 247 million subscribers, less than 1% of those users play games daily. Based on these numbers, it’s not farfetched to assume that the games you get through Netflix are not what consumers actually want.
You can chalk the reason that a significant proportion of the games on the platform are either indie PC games ported to mobile or failed mobile free-to-play that have been removed from in-app purchases. Essentially games that never had mass market appeal to begin with.
Into the Breach is probably my favorite game on Netflix Games. But this is not an original Netflix game nor does it have Netflix IP or a long lifetime. It is a port of a game that launched on PC in early 2018. And as a typical indie game, I enjoyed it for a couple of weeks. Not years, like with successful free-to-play mobile games.
Personally, I think the reason for the lack of product-market fit is a more fundamental issue. Netflix Games is somehow using the exact same fallacy as Apple Arcade, which is assuming that mobile games will be better if there are no in-app purchases or ads.
What they fail to understand is that free-to-play games are designed to monetize through engagement. And thus they have and always will beat games that are built with different models.
In plain words, if you remove monetization from Fortnite, League of Legends, Candy Crush, or Clash of Clans, you will not make the games better.
Problem #2 Return on Investment
Every single business invests into activities that either grow its revenues or profitability. If neither of the two is achieved through the investments, it has failed to return. Then again measuring the return is a whole different thing…
After a billion dollars invested into games, Netflix has released over 100 games (out of which nearly all have been released before on the same or different platforms), reached around 330 Million downloads, and earned roughly zero dollars from the investment.
And yes, some of you may say that Netflix Games is not about revenue. But that’s simply not true. The company clearly stated that the strategy has been to plant a seed for future revenue expansion.
And if we boil it down, every business has only two routes for growth. Either you grow your revenue or you grow your profitability. Improvements in quality or accessibility, investments into brands and IPs, or the addition of extra services all serve the same eventual purpose, which is either revenue (how much money customers pay) or profitability (how much do you make after all the costs have been subtracted).
But if Netflix Games is not engaging the users between their favorite seasons, not bringing new customers, or bringing direct revenue contribution, the service is not returning on the investment.
To make the case with numbers:
Netflix's annual revenue is 34 billion. Operating profit is 5.4 billion.
According to public sources less than 1% of Netflix's audience engages with games.
Netflix also reported they’ve spent a billion on the games business to date and counting.
Does this make the game’s business ROI positive? Without knowing the engagement data, it’s hard to say definitively. But subjectively speaking, you don’t quite get the billion-dollar platform vibe when playing games on Netflix.
More importantly, should Netflix continue to invest in games, which as an industry is in decline compared to when the decision was made? Or should they double down on live content and sports, which shows already outstanding traction?
It’s great that Netflix Games is getting a second chance. Yet given how ultra-ambitious the company is, we can expect the second chance to be also the last chance.
Problem #3 The Business Case
If the secret to a (financially) successful game was just focusing on fun, there wouldn’t be such a thing as indie games and there wouldn’t be Deconstructor of Fun.
"We can stop stressing about how our games generate profit on our games and instead focus exclusively on making them as enjoyable and fulfilling to our players as possible.”
- Spry Fox CEO David Edery after the Netflix acquisition
Based on this quote Netflix Games is a Willy Wonka’s Chocolate Factory of game development where super-talented games professionals make fun games for up to seven-figure salaries without having to ever even think about the business impact their games have.
Doesn’t sound sustainable. Nevertheless, where do I sign up?
Of course, games have to be enjoyable and fulfilling. But the end result should be millions of players engaging with these games for years to come. With the talent they have attracted, no business goal should be out of reach. The new boss just needs to set goals that are in line with the desired outcome of the business unit.
Whether you’re an indie or a corporation, profitability or revenue should be the end result of creating enjoyable and fulfilling experiences for players. If you're not generating either, you're living off of someone else's funding, which means you're not in control of your own fate.
Getting on the green is the only way Netflix Games will have the longevity it deserves.
Netflix Games 2.0 will likely be leaner and meaner. Perhaps even successful…
Netflix Games has embarked on a bold journey to dominate the gaming industry, but the path has been anything but smooth. Despite investing a staggering $1 billion, Netflix Games has struggled to achieve its lofty ambitions. The departing leader built a solid foundation, yet the company hasn't captured the market as intended. A strategic overhaul under new leadership will hope to turn the tide.
Back in 2022 in an interview with Netflix co-Founder and Chairman of the Board Reed Hastings, he was asked about how the company will approach interactive content in the long term. His answer was simple: "We have to be differentially great at it, there's no point in just being in it," Hastings said during the interview.
Hastings effectively pointed to the idea of Netflix becoming a gaming service that is competitive with the current industry heavyweights. "Definitely, we are growing and we are not about to be. But we have to please our subscribers with the best in the category."
In 2024, Netflix Games is not differentiated, not best in class, and not interesting to the subscribers. Among Netflix's 247 million subscribers, less than 1% of those users play games daily, as reported by CBNC.
Netflix's winning culture focuses on hiring the absolute best, giving them the highest compensation the market can offer, and offering them autonomy to do what is needed while letting them go if they fail or are not needed anymore.
Because Netflix Games failed to deliver against the vision, we should expect a restructuring to happen as soon as this year. The new head of Netflix Games is a clear signal that major changes are incoming.
It is unlikely that Netflix would shut down games altogether since it seems like a strategic focus for them. However, some of the studios will likely close down as the company focuses its efforts. We should also expect the organization to lean down as a result. Fewer original games or better quality using Netflix IPs is the likely future.
In the end, I personally remain bullish on Netflix Games. The course correction is much needed. And I believe they’ll succeed in the future given the level of talent, the culture, and the resources of the organization.
While Netflix 1.0 may not have hit its business goals, it for sure created an amazing foundation for the next generation of leaders to take the unit into business success.
Nevertheless, given where the industry stands and the fact that every single games subscription platform has failed my prediction is that within 3 years Netflix will pivot back to a licensing model. But that’s chapter three, and we’re just beginning the second chapter.
