Check out how Netflix plans to revolutionize its business with an unexpected twist. The biggest surprise here is that you’ve seen this twist before.
One might think that Netflix (NFLX 0.43%) should be ready to rest on its video content laurels by now. After dominating the video rental sector to smithereens, the company created the digital streaming business as we know it and continued to lead in the new industry, too. Netflix shifted gears in 2022, refocusing on profitable growth instead of maximum subscriber additions. The move scared investors away for a while, but the stock is sniffing at all-time high prices again. The profitable growth idea seems to work.
So it should double down on what the company does best and evolve into a slow-growing value stock. Right? After all, that’s usually what happens in the final chapters of any market-moving growth story.
But that’s not how Netflix’s leaders think. If anything, Netflix looks ready to take another sharp turn into new business territories.
Potential game changers for Netflix’s future growth
The company is juggling several potentially game-changing ideas nowadays. The ad-supported subscription plan turned out to be effective and profitable. Locally produced content drives robust growth in overseas territories, occasionally sparking global hits like the South Korean Squid Game and the Spanish Money Heist series. And I can’t ignore the recent push into live content, led by partnerships with the NFL and the World Wrestling Entertainment (WWE) events promotion business, a unit of TKO Group.
All of these ideas should shove more value into the pockets of Netflix shareholders in the long run. However, I haven’t mentioned the biggest game changer yet. In my view, Netflix’s next big move will come when the company turns its free video games into a revenue-generating business.
While Netflix has been successful with its ad-supported plans and international content, the most transformative opportunity lies in gaming.
Comparing the media and gaming markets
The video-based media market is not a small pond. The top five companies in this sector generated $168 billion in revenue over the last four quarters. That includes $35 billion in Netflix’s revenue streams.
Netflix is casting hungry eyes at the neighboring video game market, though. Entering the gaming industry in a big way could more than double the company’s total addressable market size, based on a $250 billion Statista estimate for this year’s video game revenues as a whole.
The company published its first five mobile games in November 2021. A handful of game studio buyouts followed, and Netflix’s game library kept growing. Today, we’re looking at roughly 100 mobile game titles, not counting 32 game-like experiences in Netflix’s video-viewing platform.
The titles range from lightweight, kid-friendly fare like Teeter (Up) and Exploding Kittens to more serious names such as Into the Breach or Oxenfree. There are three older entries from Take-Two Interactive‘s Grand Theft Auto series of blockbusters. Netflix also provides a range of mobile games related to its own hit shows, including Stranger Things and The Queen’s Gambit.
The games are available for free with any Netflix membership. There are no extra fees, no in-game purchases, and no advertising.
But I don’t expect them to stay free much longer.
Netflix’s long-term gaming strategy
You could argue that Netflix has good reasons to spend time, money, and marketing efforts on a perpetually free game portfolio. The games could draw single-minded gamers into the movie-viewing fold. Existing film and TV enthusiasts may find another source of instant entertainment in Netflix’s game list, arguably making them more engaged and loyal to the Netflix service.
Sure, that could happen. But the company explored a similar option 13 years ago, and took a very different path. A small but free selection of digital streams turned into the thriving video-streaming service you see today, despite loud protests when the company started asking for money.
You may remember it as the Qwikster crisis. Lots of DVD-mailer subscribers swore off the service in the face of higher prices for the new pair of services. Investors followed suit, taking the wind out of Netflix’s market sails and sending the stock price 78% lower in five months.
As it turned out, Netflix had the right idea all along and optimists who bought more stock near the bottom of that plunge have been handsomely rewarded. One hundred dollars invested in Netflix at that low point would be worth $7,075 today.
NFLX data by YCharts
Applying lessons from Qwikster to the gaming space
So I won’t be surprised if Netflix decides to copy the Qwikster event by breaking out its games as a separate subscription service. A deeply negative market reaction should be expected, followed by years of booming game service sales and a concurrent stock-price recovery. I’d be happy to chow down on popcorn while buying more Netflix stock in that dip.
I could be wrong, of course. In a recent conference presentation, CFO Adam Neumann stated that Netflix’s video game plans are very long-term and still in an early stage.
“Building the games business is going to be for the next decade of growth. And we’re two years in,” Neumann said. “Our expectation and aspiration is to grow engagement by multiples of the current size over the next few years to bring bigger and bigger games to our service, more compelling games to our service.”
That’s a different approach. But a quick separation wouldn’t be the first time a leading company changed its mind about a business strategy — and I really do expect it. Is Netflix really planning to poke that giant bear without challenging it to a serious wrestling match?
You might see Netflix’s video game operations as a user-charming side gig or as a potential revenue generator in their own right. Either way, I’m convinced that gaming will be a big deal for Netflix and its investors in the long run.