Netflix gaming push is a last roll of the dice

With subscriber numbers being hit by competitors and poor financial returns from many shows, the streaming giant is left with no choice but to diversify.

Netflix CEO Reed Hastings. Netflix’s core business may be entering a new phase after an epic run during which subscribers have grown by 22 per cent annually since 2010.

At a conference in New York last year, Reed Hastings, Netflix’s billionaire founder and executive chairman, was asked whether the streaming giant was about to dive into live sports. “Talk to us after we’re a big leader in games,” he replied. “We have a lot of investment to do (there).”

Indeed it does. Two years after the Californian company announced a new gaming division, which started out offering mobile games to Netflix subscribers, the take-up remains shockingly low. Last summer, it was revealed that of the firm’s then 221 million global subscribers (it now has 238 million), less than two million played its games on a daily basis – not even 1 per cent of users. In Netflix’s quarterly earnings reports to the market, gaming gets barely a mention. From a financial perspective, it is inconsequential.

But Netflix is not giving up. Recently, it announced the launch of the next prong of its strategy. For a select group of subscribers in Canada and Britain, it began offering access to two streaming games – Oxenfree and Molehew’s Mining Adventure – that can be played either on a television (with a mobile phone acting as the controller) or a PC.

Netflix paid $US70m ($109m) two years ago for Night School, the studio behind Oxenfree. It has struck partnerships with other developers too, such as Liverpool-based Ripstone, the maker of a chess game based on Netflix’s hit show The Queen’s Gambit. Netflix has said that much of its emphasis will be on rolling out games linked to its most popular shows.

Anya Taylor-Joy in the Queen’s Gambit. Netflix struck a deal with Ripstone, maker of a chess game based on the hit show.

Despite those anaemic early results, Netflix is doubling down because it has no other choice. “This could be an implicit recognition that there’s just no more upside in pure-play streaming,” said Eric Seufert, media strategist at Mobile Dev Memo, an industry blog. “The password-sharing crackdown (launched in May by Netflix) was kind of like the last bullet left in the chamber to supercharge growth.”

It has been a torrid 18 months for the $US180bn giant. In early 2022, subscriber numbers fell for the first time in a decade amid a siege from rival streaming services launched by media giants such as NBCUniversal, Disney and Apple. To get its mojo back, Hastings, 62, reversed two long-held policies. He launched a cheaper, ad-based tier – something he had pledged he would never do – and clamped down on password-sharing among friends and family, a practice that Netflix had openly encouraged for years.

The results were impressive. In the quarter to June 30, the company added an astounding 5.9 million subscriptions, most of which were thought to have resulted from people who had been booted out of their friends’ accounts and so finally signed up to pay for the service themselves.

While it was astute to force users to start paying for something they had for years been using for free, that trick is not repeatable. Netflix’s core business, in other words, may be entering a new phase after an epic run during which subscribers have grown by 22 per cent annually since 2010.

Indeed, the golden age of streaming is over. Hollywood and Silicon Valley have lavished tens of billions of dollars on writers, directors and actors in recent years to pump out series to fill the carousels of their streaming rivals. That orgy of spending yielded popular and critically acclaimed shows from Game of Thrones and The Mandalorian to Better Call Saul – but it turns out that, for the most part, those were very bad investments.

Lead actor Bob Odenkirk in Better Call Saul.

Disney’s streaming operation has lost $2.2bn in the first nine months of its financial year – and $11bn since its 2019 launch. Chief executive Bob Iger is slashing costs and has raised prices twice in a desperate bid to push the division into the black.

David Zaslav, boss of Warner Bros Discovery, owner of HBO and the Max streaming service, said that the idea of “spending money with abandon while making a fraction in return” was “deeply flawed”. Most streaming services have far too few viewers and are swimming in losses. Analysts are predicting a wave of mergers.

Strikes by both the writers and actors’ unions, meanwhile, have ground production to a halt as Hollywood talent tries to reverse the business model changes that Netflix normalised: paying for shows upfront but then offering little to no residuals for talent, even if a show turns out to be a success. Typically, writers and actors of shows had received healthy payouts when films or television shows became hits.

In short, the streaming model of the past decade-plus has run its course. It works neither for the talent nor for any of the streaming companies. The one exception, perhaps not surprisingly, is Netflix – the progenitor of the business model. In its most recent quarter, the California firm announced a $1.8bn profit, partly because the strikes have meant that it has spent up to $1.5bn less than it had expected to on new shows.

Yet the one-time financial bump from strike action is, like the password-sharing crackdown, not the foundation for a healthy business. And, as the streaming market reaches saturation point, it appears that Hastings and Ted Sarandos, Netflix’s chief executive, have seen the writing on the wall.

Members of the Writers Guild of America and the Screen Actors Guild walk the picket line outside of Netflix in Hollywood.

Which comes back to the gaming gambit. Seufert said: “They probably wouldn’t be doing this with as much investment if they felt like that same investment would get them just as far, or further, in their core business.”

Hastings has famously said that his competition is not just the likes of Disney, but absolutely anything one does with their free time, from drinking a glass of wine with friends to exercising to, of course, gaming.

Industry sources say Netflix has taken a hands-off approach to gaming similar to its strategy in Hollywood – inking deals with creators, giving them the resources and cash they need to develop what they want to develop, and then plugging it into what is arguably the world’s most proficient content-delivery system.

Strategically, it makes sense for Netflix to try to leverage its advantages – world-class technical infrastructure and a huge user base – to build an adjacent business. It remains to be seen whether Hastings and co can pull it off. If they do, then perhaps in 10 years’ time the company will be fighting with games developers over how to divide the spoils from an industry it has transformed.

For Netflix the gaming neophyte, it would be a nice problem to have.

The Sunday Times