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Netflix in Gaming: 4 Ways

Netflix's opportunity to expand their offering through gaming

Netflix in Gaming: 4 Ways

During Netflix’s latest earnings call, it was hinted that they could move into gaming. Greg Peters, COO and Chief Product Officer at Netflix, said that they are trying to “figure out all of the different ways that we can increase those points of connection and deepen that fandom and certainly games is a really interesting component of that.” While he then mentions that this would never be seen as a primary source of income, they are at least considering it. If they went down this path, it would be Netflix’s pursuit of two-way interactive entertainment and a hedge away from passive entertainment (one-way), which has been their focus since inception.

If Netflix were to move into gaming, I think it could happen in 4 specific ways:

Cloud Gaming: In 2012, Netflix began to roll out their own Content Delivery Network (CDN) so they could own the infrastructure supporting their customers when streaming content. Netflix’s Open Connect is currently built to support video streaming, which has predictable data streams. If they entered gaming, the key value proposition would be that Netflix’s CDNs are traditionally within 30km of their customers. This is an advantage for Netflix because they’ve built out their CDN network in metro-core locations. This could create a strong cloud gaming experience through TV apps, PC, console, or mobile.

Distribution: Could Netflix compete with Steam? Netflix is already the most popular and well known TV and movie distribution service so gaming seems like a potential add-on here. One major advantage here that Netflix has over Steam is that gaming is already transitioning towards the subscription service model, which is a great fit for Netflix's pre-existing subscriber base. Unlike many startups who have tried to upend Steam, Netflix has an existing business model that would allow them to keep distribution costs down (similar to what Epic Games Store is doing). On top this, Netflix has a massive user base that, according to DFC Intelligence, comprises millions of existing gamers. This would likely take place in mobile and PC, not console.

IP Leverage (the publisher model): Netflix has a vast library of original IP that they own outright (or license). They could look at competing on the content side and build their own games. Netflix released 135 original series in 2019 alone yet much of their content ends up having a short life cycle on the platform. Adding a video game component would elongate the monetization and value creation for various pieces of content. For example, Netflix could make a video game out “Stranger Things” and release it to their subscriber base instead of licensing to a third party who would take a lot of the economics.

Netflix Buys Discord: while I think this is highly unlikely, it’s possible that Netflix considers making a major acquisition in gaming to pursue the strategy of “buy” vs “build”. A key candidate for them could be Discord, who just walked away from a potential $10B offer from Microsoft. Netflix's current market cap is ~$223B. If Netflix were to buy Discord, it would be to own both a social platform as well as a distribution portal for games (a strategy that Discord may explore further in the coming years). This would be an interesting way to step into gaming by acquiring Discord and building out a social layer that allows them to turn Netflix into a social video and gaming community. The Discord community of 140 million MAUs could be an interesting acquisition to boost anemic growth in their legacy OTT subscription business. For context, Netflix currently has ~208M subscribers. The partnership could include watch parties in servers, stronger recommendation engines with more user to user data, and an easy gateway to the gaming market.