July 30, 2021

The “Netflix of Games” Winning Platform May Just Be Netflix

What Happened
Netflix confirmed recent rumors about entering the games business with the hiring announcement of Mike Verdu from Facebook Reality Labs (Facebook’s Virtual Reality division). Verdu will be Netflix’s vice president of game development.

To some degree, this should not be a surprise. Netflix CEO Reed Hastings once made a statement in a quarterly earnings report that the videogame Fortnite is a bigger threat to its business than HBO (full disclosure, I was head of publishing at Epic Games and my responsibilities included Fortnite).

Netflix recognizes that their competition for screen time also comes from games, but this announcement marks a departure from Netflix’s previous public position that was negative about starting a games business. “No,” Hastings said in 2019 when asked if Netflix might make a game-streaming service. “We’re really focused on doing incredible series and films and unscripted.”

Why This Move is Important
Netflix is a victim of its own success. It’s high household penetration (207.64 million paid subscribers worldwide as of the first quarter of 2021) and successful global expansion (Netflix is available in 190 countries) means that opportunities for easy growth are limited. Driving incremental revenue through new content categories is critical, and games are a big target. Video Games are estimated to have global revenue of over $175B in 2021, making it much larger than the film industry’s $100B in revenue.

Entering games will also give Netflix an insurance policy for the future. For Generation Z (people born between 1997 and 2006) watching TV and movies at home ranks fifth, behind listening to music, browsing the Internet, and engaging on social platforms.

In other words, unless Netflix can find content to attract viewing by cats and dogs, video games may be the best way to drive growth in both engagement and revenue.

What Will Netflix Do?
Netflix has not announced what their actual video game strategy will be, so until they make another announcement, all we can do is speculate. It’s difficult to infer anything from their first games hire. Mike Verdu is a well-respected and much-liked industry veteran. His recent work history is skewed toward mobile video games, but is broad enough to include both Virtual Reality and AAA console/PC games. Verdu is capable enough to lead Netflix’s games business in any direction.

There is no way to guess at this point whether Netflix will offer streaming games or require a download, or what devices they will utilize (mobile small-screen or TV/PC big-screen games are quite different to build and play). It’s possible (but not likely) that Netflix could even release their own dedicated games device. We also can’t know if the business model will be bundled with the existing Netflix service or offered as an added-value tier. Games could even be offered free-to-play and monetized via micro-transactions. Anything at this point is possible.

A New Genre of Entertainment?
It may be wrong to try and shoehorn Netflix’s options into existing business models. Netflix built its business by breaking conventional industry practices. Netflix’s single foray into a direct game offering to their subscribers was 2018’s Bandersnatch, an “interactive fiction” episode of Black Mirror that allowed viewers to make decisions for the main character, with different outcomes depending on different choices.

I expect that Netflix may move into the emerging new category called MILE (massively interactive live events). This new category was pioneered by the startup company Genvid and demonstrated in the Facebook interactive experience Rival Peak. A MILE experience allows viewers to influence the events of a live-streaming game as it happens in real time (not unlike the competitions at the center of the Hunger Games films). MILEs are more engaging than just watching TV, but less intense than a video game, and don’t require video gaming skills to play.

Genvid just raised $113M to develop more interactive events, and the timing of Genvid’s announcement matches with Netflix’s move into games. This could be just a coincidence, or perhaps it is simply two companies aligning around a potentially major new trend in entertainment.

Will Netflix Succeed?
The track record of big tech companies moving into games is dismal. Google already shut down the game studio for their Stadia cloud gaming service, which failed to build an audience. Amazon has failed multiple times – with the Lumberyard game technology, with their internal Amazon Game Studios, and with their Luna game streaming service. Even Apple has struggled to find an audience for their Apple Arcade service, in spite of a high-quality catalog of unique exclusive content. None of these companies has abandoned their initiatives yet, but all continue to struggle to gain market or industry traction.

I am nevertheless cautiously optimistic about Netflix. Netflix understands that winning in games is about content, not technology. Netflix’s experience in driving content deals, and their own strong catalog of IP give the company a competitive advantage over Amazon, Apple, or Google.

If Netflix can avoid the pitfall of competing with existing game platforms and define a unique space in interactive entertainment, they can build a new audience and dominate the category, just as they did in linear entertainment.

Implications for the Television Industry
Netflix’s bold move into games represents another threat to any provider of linear entertainment, as success in this space will steal more screen time away from traditional television viewing. As they have done before, Netflix has the opportunity to build a first-mover advantage in a new category of entertainment and leverage their IP catalog to strengthen their competitive advantage. Many Hollywood studios and networks have been paring down and selling off their games divisions recently, which will have them taking a knife to a gunfight if Netflix succeeds.

Stick with TDG to Stay in front of the Curve.

 

Mike Fischer is a veteran of the video and gaming industries, having held executive positions at Microsoft, Amazon, Epic Games, and Square Enix. He is also a member of the faculty at the University of Southern California.

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