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The video game business will be harder for Netflix than streaming

Netflix (NFLX) may need to reinvent itself as people become unglued to their couches and streaming competition from the likes of Disney (DIS) and Amazon (AMZN) heats up. Just Tuesday, Netflix reported a third-quarter new subscriber forecast that fell 2.3 million below Wall Street’s expectations.

The streaming giant also confirmed that it’s diving deeper into one of the hottest entertainment markets around: video games. That confirmation follows news that Netflix hired EA (EA) and Oculus (FB) veteran Mike Verdu as its new president of game development — a move that could, in theory, help the streaming giant find new revenue streams as subscriber growth slows.

But the $300 billion gaming industry poses huge challenges, even for well-funded tech giants. Amazon’s initiative suffered a massive setback when its title “Crucible” was released in 2020 and then pulled back before being axed completely. Google, meanwhile, spun its own wheels with its game studio Stadia Games and Entertainment, before shuttering it less than two years after launching the venture.

Even Apple (AAPL) has struggled to make its Apple Arcade service a certified hit out of the gate, with the company cancelling games, and changing directions to include classics like “Monument Valley” to entice fans.

“The concept, or the tagline ‘Netflix of games’ is infinitely simple, infinitely understandable and is a great concept,” IDC research director Lewis Ward told Yahoo Finance. “The execution of that concept is much harder than it sounds because games are not [video on demand].”

Mobile-first isn’t easy

Netflix’s foray into gaming will focus on mobile games. The company already has two titles with its “Stranger Things” games, but those weren’t available through Netflix, and instead launched on the PlayStation, Xbox, and Switch, as well as mobile devices.

It’s unclear how building games outside of the Netflix app will benefit Netflix itself. If anything, it would pull users away from Netflix.

And while mobile games can be developed in roughly a year, rather than as many as four to five years for big-budget console and PC titles, the mobile games space is already incredibly competitive. Even some of the biggest names in gaming have struggled with mobile.

“I’ve covered eight public gaming companies that have gone bankrupt in the last 20 years, and Netflix shrugs it off and says ‘We’re going to go into mobile’,” Wedbush Securities Managing Director Michael Pachter told Yahoo Finance Live.

“Take a look at Activision (ATVI), EA (EA), Take-Two (TTWO), Ubisoft, and Nintendo (NTDOY) and tell me what their mobile prowess is. They’ve all bought their way in. None of them has created a mobile game that’s been successful until Activision created ‘Call of Duty’ just a year and a half ago. This is a really, really hard business,” Pachter added.

The scarcity of available video game developers makes the business even more difficult.

“You can see that if you look across the gaming landscape, just how much consolidation you're seeing,” Truist Securities’ Matthew Thornton told Yahoo Finance. “You're starting to see more and more focus on fewer titles by a lot of the big publishers, because just to stand up a new successful game of any size is just increasingly difficult.”

Netflix’s other gaming options

Netflix does have other avenues for approaching gaming beyond pure mobile, including cloud gaming — which allows gamers to stream high-quality console games on their laptops, smartphones, tablets, and TVs. But cloud gaming could also pose challenges.

According to IDC's Ward, Netflix would need to ensure it offered connection speeds with latencies of below 150 milliseconds. That’s a serious ask even for a company that lives online.

So far, Microsoft (MSFT) has seen the most success with its cloud gaming platform, but it’s not available everywhere in the world. Google’s Stadia hasn’t caught on as the company hoped it would, and Amazon’s Luna is still in beta.

And while cloud gaming is the Holy Grail of gaming, it also needs to allow gamers play with people using other systems via something called crossplay. Even if Netflix did jump into cloud gaming, it would need to ensure the hardware you’re using to stream is compatible with the company’s gaming service. Then there is the issue of controllers, something that Patcher says will be an issue regardless of how it jumps into gaming.

“You’re going to need a game controller that talks to every TV, every Fire TV stick, Roku Stick, Chromecast, that technological challenge is nearly impossible.” he said. ”I do not see Netflix surmounting that challenge.”

Interactive shows may work

So, what are Netflix’s options to diversify beyond mobile gaming? One option could be interactive shows. Facebook saw success with the show “Rival Peak,” which allowed viewers to decide what should happen to characters or simply watch along without having to get involved.

“You can watch these characters as they go through this storyline over time,” Ward explained. “And there's decision points where you can either help them or hurt them, and they come up every few minutes where you're going to, you know, have an option to have some input.”

The show, which ran for 12 weeks, saw more than 100 million minutes watched, a number that could prove to be a boon for Netflix if it offers a number of similar shows.

Netflix dipped its toes into interactive entertainment with its “Black Mirror: Bandersnatch” special, which was so successful it’s already announced it will offer additional interactive entertainment options.

The road ahead will be difficult for Netflix, especially as investors are looking for any opportunity for the company to return to regular growth.

“They're going to experiment, they're going to learn, but the overarching goal here is to grow the initiative such that it affects engagement and retention,” Thornton said. “Because with the size of this platform, as we all know now, little ebbs flows in retention have an outsized impact.”

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