The fact that Netflix let it leak out that it is taking the first steps toward entering the lucrative video game market less than a week before it is slated to release its Q2 results, left some analysts cautiously enthusiastic. While the prospect of the SVOD giant entering yet another market that it could potentially dominate raised spirits, the timing caused some caution among those who suspected it could be a move to divert attention away from possibly lukewarm quarterly results.
Investors appeared on the fence as well, with Netflix stock closing at $542.95 each on July 15, down about 1%.
Netflix hasn’t released any details as to how it will attack the video game market, but has confirmed to several outlets that it has hired former EA and Oculus executive Mike Verdu to head up a game publishing team as VP of gaming development at the SVOD pioneer. While Netflix again has issued no details on its plans, Bloomberg reported that the company will make video games part of its service as early as next year at no additional charge.
The idea that Netflix would eventually get into the video gaming business has been kicked around for years. In a research report earlier this week -- before news of Verdu’s hire -- Canaccord Genuity analysts Maria Ripps and Michael Graham wrote that video gaming is a natural extension of the business, given that Netflix already has several content titles based on video games, and releasing downloadable games could help the company capture a bigger chunk of younger viewers. The analysts noted that the recent extension of its deal with producer Shonda Rhimes included potential gaming and virtual reality content.
Whatever the plan, the notion that a streaming service with more than 200 million paying customers worldwide is thinking about streaming video games, sent video game retailer GameStop’s stock down 7% July 14, and down another 3% in early trading July 15.
In a research note, Bernstein media analyst Todd Juenger offered two pros, two cons and two concerns about the notion of Netflix entering the video game space. On the pro side, Juenger noted that adding video games to the product mix enhances Netflix’s overall value.
"If your subscribers are sometimes/frequently choosing video games as an alternative to watching Netflix, then why not offer them that option within Netflix?,” Juenger wrote.
Also on the pro side: an increased value proposition and increased engagement will drive higher penetration, higher ARPU and reduce churn.
On the con side, Juenger questioned the timing of the leak, a week before earnings, which most analysts expect to be weak, come out.
“The idea that, knowing Q2 results and the Q3 guide will be received as weak, Netflix leaked this story now (before reporting Q2 next week) in order to change the narrative, distract, divert attention from the core business,” Juenger wrote. “Give everybody something else to focus on and talk about.”
Also on the down side is that the move could be seen as a defensive one because Netflix sees that the market for SVOD is getting too crowded.
“Bears could view this expansion into a new product category as a tacit (or not so tacit) validation that management sees the core business reaching the point where growth significantly slows, and therefore the company needs to do something new/extra to keep growing,” Juenger wrote.
As far as concerns, Juenger said moving into a new market could be a distraction for management, when one of the selling points for the stock has been its executives’ laser focus on the core business. Video games could force some to take their eye off the SVOD ball just when the market is filling up with competitors, all bent on gaining audience share.
“Now, having said that, it is possible to walk and chew gum simultaneously, and one could argue that the lines are already blurred between what constitutes on-demand video entertainment versus interactive video game entertainment,” Juenger wrote. “And the IP works in both settings. On the other hand, the track record of legacy video entertainment companies developing their own video games is very poor.”
Other reports have pointed to Google, which in February scrapped its own in-house video game studio -- Stadia Games and Entertainment-- after less than two years.
Juenger also expressed concern over pricing, adding that if Netflix included gaming as part of its SVOD service, it would probably eventually have to increase the price down the road, risking alienating subscribers who may not want to play video games. Making gaming a separately priced/a la carte option could solve that problem, but Netflix would lose some scale economics in that scenario.
Netflix could offer gaming as part of its Premium Tier only, but Juenger said that flies in the face of the company’s edict that content remains the same across all versions of the product.
“All of these options raise the very common business tension of balancing flexibility versus simplicity,” Juenger wrote. “The current Netflix pricing model is extremely simple. Three plans, three prices, the only difference is the number of simultaneous streams (and in some markets, a fourth option, one stream, mobile-only). To the extent Netflix tries to give consumers explicit choices and options around how to include video games, or not, in the service, and whether that includes a new form of in-game spending, all creates complexity to the offering which has a proven detrimental impact on adoption (the paradox of choice).”
Juenger added that on the positive side, Netflix has reams of consumer information on which to base its approach, and likely has anticipated and addressed most of the concerns around pricing and product design through countless focus groups and research. And in the end, if it doesn’t work out, Netflix can just walk away from gaming.
“To its credit, Netflix has always erred on the side of choosing the risk of moving too fast and bold, rather than the risk of moving too slow and safe,” Juenger wrote. “There is a rather high probability, frankly, that in hindsight, ten years from now, this idea will look like a no-brainer.”
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Mike Farrell is senior content producer, finance for Multichannel News/B+C, covering finance, operations and M&A at cable operators and networks across the industry. He joined Multichannel News in September 1998 and has written about major deals and top players in the business ever since. He also writes the On The Money blog, offering deeper dives into a wide variety of topics including, retransmission consent, regional sports networks,and streaming video. In 2015 he won the Jesse H. Neal Award for Best Profile, an in-depth look at the Syfy Network’s Sharknado franchise and its impact on the industry.