Netflix Entering the Gaming Market Underlines the Immense Potential - Rolling Stone
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Why I Think Netflix Entering the Gaming Market Underlines the Immense Potential of the Industry

It’s not surprising to see an aggressive data-led company like Netflix look to gaming.

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Opinions expressed are solely those of the author and do not reflect the views of Rolling Stone editors or publishers.

About a decade ago, when Netflix launched on game consoles, most of my colleagues in the gaming industry shrugged. However, I was concerned, and I told my colleagues the move meant we’re competing for a share of our audiences’ free time, and there is a limit to that. Within a couple of years, I saw how gaming constituted less time spent on the consoles. On the WWE’s most recent earning’s call, president and chief revenue officer Nick Khan joked how the company “competes with sleep.” Recent events have proven both of those things correct.

With the explosive growth of gaming over the pandemic, as well as a rapid expansion into AVOD and SVOD by competitive streaming services, Netflix actually lost nearly half a million of its subscribers. Their potential answer to that, it appears, is to enter gaming.

In their Q2 2021 earnings report released on July 20, 2021, Netflix announced officially what had been rumored, that they are looking to expand into the gaming industry.

On the surface, it makes sense. What content company would not want to increase engagement, help user acquisition, drive ARPU and reduce churn? Especially when you might have the start of a churn issue.

A letter to shareholders on the earnings revealed that Netflix’s move into the gaming industry will be treated as a new category, but that they see this opportunity as an extension of the core entertainment offering they have been focused on for the last 20 years. Today, the largest and most valuable group of content consumers is Gen Y, colloquially known as Millennials, and Gen Z. Netflix understands that while these audiences enjoy the amazing worlds and storylines they have created, these users often spend more time and have deeper engagement with their favorite gaming titles and platforms. About 87 percent of Gen Z and 83 percent of Millenials play video games weekly.

Some factors will set Netflix apart from other content distributors looking to enter the gaming industry. According to the earnings report, Netflix is not overly concerned about monetization at this point and will not be thinking about ads, in-game purchases, per-title purchases or other monetization tactics. Overall, the earnings call showed that their main goals are to deliver entertaining game experiences, evolve over time and extend their IP.

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If only it were that simple. While we know little about Netflix’s tangible plans, some factors weigh heavily.

First, despite how much Netflix invests in content creation today, AAA game development economics is more akin to Blockbuster moviemaking than streaming shows. For example, a publisher like Activision spent roughly $200 million making Call of Duty Modern Warefare 2 and with $150 million of that budget marketing the game. That’s just one game. While they are not capital-constrained, those are big bets and big investments.

Secondly, the days of winning in gaming from licensed entertainment intellectual property are largely over. Of the top 10 games sold in June 2021, per NPD, I found only one title, Marvel’s Spiderman: Miles Morales, based on entertainment IP and that was a comic book long before it was a movie or TV show. Additionally, the bulk of gaming-centric original intellectual property to make such games lives outside of Netflix’s ownership. After Stranger Things and a couple of other titles, where is the franchise ownership that aligns with great gaming?

Third, while Netflix has a large installed base globally, so does Xbox, PlayStation and Nintendo in the developed West; and nearly everyone in the target market has a mobile phone with access to an app store across the rest of the world. The platform’s scale for distribution and trial isn’t a competitive moat. The consoles have massive reach; FAANG companies have massive reach. In China, companies like Tencent have massive reach. Again, not a slam dunk for Netflix.

We’re only beginning to realize the true potential gaming holds, as users spend less and less time viewing linear media. Some estimates at NBCU project that digital platforms will pull equal with linear media in terms of user adoption and viewership within the next year. As valuations of gaming companies and platforms that enable gaming increase, we may find ourselves at a content consumption threshold.

When it comes to leveraging scaled audience bases, looking at ARPU and LTV, or churn and customer retention, gaming holds a leadership position. I believe this leadership will continue to grow as esports expands and as skills-based wagering and other new monetization schema are added to an already multi-billion-dollar category.

Therefore, it’s not surprising to see an aggressive data-led company like Netflix look to gaming when trying to overcome some headwinds. Hence, I see this as good news for those of us in gaming. It’s proof we’re in the right place at the right time.

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