Netflix expands into gaming but critics aren’t convinced

The process behind Netflix’s plan to enter the gaming market.

Netflix has hired Mike Verdu, former Oculus and EA exec, to lead its venture into the gaming market – in an effort to bring on new subscribers amid slowing growth.

Feels like yesterday when Netflix started streaming

After record subscriber growth in 2020, Netflix added only 1.5m new subs in the second quarter – the lowest in a decade. Confirming what investors were already expecting: Netflix is transitioning from a growth company to a mature one.

How does it look as a mature company? Here’s its second-quarter report of 2021:

• $7.34b in sales, up 19.4% from Q2 2020.
• $1.35b in net income, 87.5% more than Q2 2020.
• 3.5m expected subscriber growth in Q3 – only 32% of last year’s sub growth.

Everything beat expectations except earnings growth — sending the stock down 4% since then. But now, Netflix is looking for other ways to bring on new subscribers.

While the company had success differentiating itself with Netflix-exclusive shows and childrens content in the past, gaming will be a lot more difficult to pull off.

Investors have seen this episode before

With Amazon Prime reaching the 200m subscriber mark (9m shy of Netflix’s 209m) and more competitors entering the $60b video streaming market, Netflix is feeling the pressure — and gaming won’t be any easier. Competitors tried this route… and it hasn’t gone well:

• Disney (NYSE:DIS) ended its unprofitable Infinity gaming business in 2016 despite making over $1b in revenue.
• Google (NASDAQ:GOOGL) shut down in-house game development for its Stadia platform in February.

Netflix is missing some key pieces that other gaming systems tend to have: consoles and a controller. And without any acquisitions in sight, it’s unclear how Netflix plans to build out the infrastructure needed for gaming.

Investors: Are you still watching?

Although industry experts don’t expect the gaming service to generate much revenue, it could still provide some positives for Netflix:

• Improve engagement by spinning off existing shows into games and other interactive experiences.
• Justify future price increases despite saying gaming services will be included at no extra cost.

Wedbush’s managing director Michael Pachter elegantly summed up what many critics think about Netflix’s move, saying he “does think they will try, and does think they will fail.” Either way, Netflix is playing on hard mode for the foreseeable future.