Why Netflix is getting serious about video games

The streaming service could succeed where other entertainment players have failed.

An image of the red Netflix logo on a black background.

Netflix has hired a top Facebook exec to build out its games division.

Image: Netflix

Netflix officially threw its hat in the gaming ring on Wednesday, but the move shouldn't have come as much of a surprise. The company's interest in developing and publishing games has been swirling since at least 2018, when it released the interactive "Black Mirror: Bandersnatch" special. Since then, Netflix has developed several successful series based on popular video games and even launched Stranger Things games for mobile and the PlayStation VR headset.

But news of Netflix's hiring of Oculus VP Mike Verdu, a gaming executive with an impressive track record overseeing mobile game development at companies like Electronic Arts and Zynga, signaled the company was finally serious. We don't know what shape its gaming service will take, but reports peg a launch for 2022 involving a mix of titles Netflix builds itself as well as those from third-party developers, all offered from within the Netflix app.

There's a good reason Netflix wants in on gaming. The attention economy has increasingly organized itself around the most time-consuming and lucrative forms of media in recent years — in other words, video games. With only so many hours in the day and limited ways to monetize that engagement with traditional media, companies are stuck competing for a diminishing amount of ad dollars and subscriber revenue. Games offer a new path.

  • Fortnite, Roblox and the scores of mobile juggernauts each earning multiple billions of dollars per year figured out that the best way to keep people coming back and spending money is to create engaging social spaces and layer digital economies on top. (Or, at the very least, create an addictive loop and give it away for free, monetizing it in other less savory ways.)
  • Traditional TV, structured around milking series and big hits, is ill-equipped to compete with companies actively trying to create a next-generation internet. The metaverse, a "Ready Player One"-style fusion of ecommerce and entertainment, is the stated goal of companies like Fortnite maker Epic and Roblox, and whatever form it takes may make traditional film and TV obsolete.
  • Netflix co-founder Reed Hastings, as early as 2019, cited Fortnite as one of its biggest competitors. "We compete with (and lose to) Fortnite more than HBO," Hastings wrote in that year's shareholder letter.

Netflix needs to diversify its business, and gaming is a great way to do that. Much of Netflix's growth is tied up in subscribers, and the company can't keep adding new paying customers at the same rate forever. Although Netflix saw a boom in subscriptions last year, that growth slowed significantly in the first three months of 2021 as the effects of the pandemic began wearing off.

  • There is a ceiling on the number of people willing to pay a climbing monthly subscription fee, especially given today's overabundance of entertainment services. If Netflix can create an Apple Arcade-style bundle, which Axios earlier this year reported was one potential business plan, the company could make it a complimentary add-on to its existing service and avoid inducing subscription fatigue.
  • Gaming is a good differentiator against other streaming services. Netflix right now competes for attention with video games, YouTube and Twitch, but it still competes for subscribers with the likes of Disney and HBO. Catering to gamers could tilt the scales.
  • Many of Netflix's competitors in TV and film are part of massive conglomerates, all of which have extremely diversified revenue streams across theme parks, telecom subsidiaries and other businesses. Few of those companies with the exception of Sony and Warner Bros. are remotely successful in games.

Netflix has all the ingredients for success. The company changed the way the entertainment industry developed and distributed film and TV, and there's quite a few reasons to believe it could find success in developing and publishing games, too.

  • Netflix built its original content empire on making unorthodox deals with showrunners and filmmakers, offering them more freedom and resources with fewer strings attached compared with traditional studios. As such, it's produced award-winning movies, shows and documentaries, and it's become a trusted and undeniable force in everything from anime to comedy.
  • Netflix's hiring of Verdu is a sign it's more interested in developing mobile hits than big-budget console or PC games. That makes sense. Like Apple with Arcade, Netflix could find success courting small indie developers to make premium games for smartphones while also running in-house development for titles based on its own intellectual property.
  • And Netflix does have a vast well of IP ripe for games. The company is already working with its "Witcher" partner CD Projekt Red on upcoming expansion content for a rerelease of The Witcher 3. It could become more active in developing or producing Witcher spinoff games, as well as games around untapped properties like "The Umbrella Academy," "Narcos" and "Money Heist."

Gaming is a notoriously arcane industry requiring astronomical amounts of money and talent to succeed. Many companies, even those like Amazon and Google with software expertise and vast resources, have failed to replicate the success of even small- to medium-sized developers operating with the experience necessary to navigate the games business. Disney, with Marvel and "Star Wars" at its side, has repeatedly fumbled when trying to translate those media properties into successful games.

It's not certain Netflix will succeed. In fact, it is more likely, given the tech and traditional entertainment industries' track record here, that Netflix will fail. But it is in Netflix's best interest to expand beyond the confines of traditional TV and film if it's to continue growing and maintaining its edge over rivals. It has a mobile app to feature its games, a talent scouting team to find creators to make them and expertise in building big hits out of nothing. Now, it just needs to bring the same ambitions it brought to TV over to gaming. Anything less and Netflix risks letting Fortnite and Roblox win it all.

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