What Netflix Should Consider Before Diving into Gaming

The gaming industry is a lucrative space. With over 2.7 billion gamers spending $159.3 billion USD in 2020, and an estimated annual growth rate of over 9% in the next five years, it’s no surprise big tech is eyeing this market. In recent years, tech giants like Microsoft and Apple have been fixated on gaming subscriptions, which if successful could tilt the scales and shift the power from game studios and publishers to a few digital distributors.

Word on the street is that Netflix will be the next giant to join the race for the gaming subscription crown. The Information was the first to break the news (via The Verge) on Netflix’s plans to expand into the gaming sphere, reporting that Netflix was looking to hire an executive to supervise new gaming efforts. Various sources have disclosed that the company is exploring a bundle of games similar to Apple Arcade, which is a $5-a-month subscription service that allows users access to a library of over 180 games from a variety of publishers which can be played across Apple devices.

Apple Arcade (like most of Apple’s services) isn’t exactly a model of success. There was a lot of hype around the service when it launched in September 2019, but reception has been extremely mixed, with many subscribers cancelling after a few months due to the quality of games Apple Arcade had to offer. You can’t even find numbers on the revenue this particular service has generated, although some estimates place it at roughly $720 million in 2020 (that’s roughly just 1% of the revenue generated by Apple Services).

But the rationale behind Netflix’s move into gaming is also pretty clear. Their Q1 earnings were disappointing, mainly due to slowing subscriber additions. With new entrants into the video subscription market in 2020, Netflix is losing market share fast – falling from 29% to just 20%. With increased competition in the entertainment market, differentiation is more important than ever. And Netflix seems to think the introduction of gaming services could be one way to stand out. It’s hard to say whether or not they’ll be successful, but Netflix should seriously consider a few key things before jumping in the deep end.

1. Understanding entertainment doesn't equal understanding games

Netflix knows how to engage users for about an average of half an hour – the average user spends about 18 to 27 minutes a day on the platform. But the most successful games can engage users for hours a day. More than 70% of Fortnite players spend in excess of six hours a week playing, and at least 20% spend 16 hours or more.

Creating an engaging game requires a completely different methodology from creating an entertaining show, even if you have the IP in place. Just take a look at the Cyberpunk 2077 flop – even with Keanu Reeves, killer graphics, and awesome soundtracks many still deemed it as one of
the decade’s biggest flops due to poor game design, glitches, and boring
gameplay. (It did sell pretty well, though.)

2. Game streaming is no simple task

There’s a fundamental difference between Apple Arcade and a Netflix gaming subscription service. Apple Arcade allows users to download games through the app ecosystem onto various Apple devices, whereas Netflix would need to stream the games directly. It’s relatively easy for Netflix to stream video data to TVs, smartphones, laptops, and PCs – most users have decent Internet connection nowadays. Besides, the occasional stutter is generally acceptable if you’re just watching an episode of “Stranger Things”.

Streaming graphic-intensive games is a different story, and relies either
on data centers, or an external server for hosting game streams. And Netflix shouldn’t underestimate how important streaming quality is on the game experience – it can mean the difference between playable and unplayable in some cases.

3. Core advantages

Netflix faces some pretty stiff competition in the gaming subscription
market. Sure, 207.6 million Netflix subscribers seems like a large number, but when compared with over 1 billion iPhone users, that no longer seems like an advantage. But there are only an estimated 12 million subscribers of Apple Arcade – that’s 1% of total iPhone users.

One of the most successful game subscription services is arguably Xbox Game Pass with 23 million subscribers, but part of that’s due to Microsoft’s strategic advantage with its Xbox’s gaming arm which has a huge back catalog of games like “Halo” and “Forza”. That’s experience Netflix is completely lacking.

Netflix’s biggest advantage is probably the IPs they own – "BoJack Horseman", "Stranger Things", "Umbrella Academy", etc. Honestly, it makes more sense for Netflix to start out by licensing their IPs to game publishers to develop subscription-based games. Then, based on the success or failure of those games, decide whether or not to actually build a Netflix game subscription service.

4. Sky high development costs

Let’s just assume for a second that the game streaming subscription
model makes sense for Netflix. How much would it cost to develop? A triple-A game can cost anywhere between $50-$100 million to develop. Bundle in marketing costs and you could be doubling that number. (Even if you’re willing to dole out a couple hundred million dollars, success is not guaranteed.) BUT, in order to actually deliver the Netflix of gaming, you’d need more than one game.

Netflix would need to set aside billions of dollars to build an in-house development team, or acquire full-fledged game publishers in order to even compete with the subscription services offered by existing gaming powerhouses like PlayStation. Even if they just wanted to replicate Apple Arcade, they’d be looking at a development bill north of half a billion dollars.

5. Target audience

This is arguably the most important thing. Without a clear audience in
mind, it’s going to be pretty hard to develop the right games. At this stage, I’m not entirely sure who Netflix wants to target. There are hardcore gamers, and your average user who games every now and then.

Hardcore gamers definitely have a selection of games which they’re fully committed to, and are most likely already subscribing to one of the gaming powerhouses (if they’re even remotely interested in game subscription services). I also doubt Netflix has the expertise required to develop games that will resonate with these gamers.

But if the average user is who they have in mind, these are people who
are used to free-to-play games. And free-to-play is becoming the norm –
according to AppAnnie, 99 of the top 100-grossing mobile games in the US are free. On PCs, 6 out of the world’s top 10 titles (and 4 out of the top 4) are as well. Convincing users to change their habits will definitely take some work.

To conclude, I’m not saying Netflix shouldn’t consider gaming. But there are other ways of jumping on the gaming bandwagon, like licensing out their IPs to game publishers, or increasing the variety and frequency of interactive content like Bandersnatch. For some reason, when I think of Netflix adding some sort of gaming module to their current service, I'm reminded of that in-flight entertainment option you get on long-haul flights. Movies, TV shows, weird games to entertain little children. Puts things into perspective.

In fact, the rise of the metaverse makes me pretty skeptical about the gaming subscription model in general. But, that’s a discussion for another time.