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Analysis: Netflix Faces Tough Battle Launching Gaming Service

Gary Symons

TLL Editor in Chief

Netflix is planning a push into the video game market, with Reuters and The Guardian reporting the streaming giant intends to establish a gaming subscription service similar to Steam, Apple’s Arcade service, or Microsoft’s Game Pass.

As happened with the model of renting movies on CDs, video games are now being downloaded in increasing numbers, and subscription services have become the fastest growing segment of the industry. Just as Netflix drove a spike into the heart of Blockbuster, so too are subscription gaming services taking marketshare away from struggling physical retailers like Game Stop.

Now, the biggest streamer of them all appears to be getting into the act, with Reuters reporting the company is headhunting an executive to oversee its expansion into video games, citing a source “familiar with the matter.”

The move by Netflix and other competitors in the space are based on market economics, as global video game revenues are now estimated at a value of approximately $156 billion, and expected to grow quickly to $256 billion by 2025. To put those numbers into perspective, that’s more revenue than movie box office, television, and music combined. The move also comes at a time when the video gaming industry has benefited from a surge in demand from gamers staying at home during the COVID-19 pandemic.

As well, the tech site The Information reported that Netflix is discussing the offering of a bundle of games, similar to how Apple handles its Arcade service, and that Netflix has approached several senior game industry leaders about collaborating on the creation of that subscription service. 

Netflix has some limited experience in the gaming industry, having licensed properties like Stranger Things and the Dark Crystal to video game developers.

While game subscription sales are growing, the industry is still relatively new, and it’s not clear who is best positioned to take the lead. Steam is the granddaddy of the industry, launching in 2003, and by 2017 had reached $4.3 billion in revenue. However, analysts also point to much larger corporations like Apple, Google and Microsoft diving into this market, even though their efforts thus far have not been that impressive. As of 2020, analysts estimated Apple had 12 million members paying $5 each, ringing in about $720 million in revenue, which for Apple is a pittance. Similarly, Google’s game service has been seen as underperforming thus far, but analysts also point out that both companies have a near stranglehold on the mobile gaming industry through their iOS and Android operating systems.

Steam is the granddaddy of gaming subscription services, launching in 2003.

Microsoft is traditionally a much bigger player in both the console and the PC gaming market, selling both subscriptions and hard copies. The reason for this is technically arcane, but boils down to the fact that Microsoft moved to dominate gaming early on by developing a gaming operating system called DirectX, which is by far the most popular system used by game developers. Most other developers worked on the open source OpenGL system, which simply doesn’t have the same bells and whistles, and isn’t as widely accepted.

All of that said, Netflix is moving into a space with which the company is very familiar, which is downloadable content from servers. Netflix houses its content on Amazon servers, and with video has developed the largest market for streaming in the world. In that sense, developing a system to store and download video games is right in the company’s wheelhouse.

What may be more difficult is the task of carving out a unique niche in the market, and in this regard, many analysts think Netflix is coming after Apple’s Arcade service, or Google’s Stadia game streaming operation, neither of which are yet posting massive numbers. If that is the case, then Netflix will face a serious challenge, but to know why, you have to understand how the video game market is evolving.

In the past, gamers generally bought DVD hard copies of games that were used in computers or consoles. Today, most games are downloaded, and many of them are Free To Play (FTP) games offering in-game purchases, like Fortnite for example, in which gamers buy improved weapons or skins. Another growth area is mobile gaming, but that puts Netflix up against the closed systems owned by Apple and Google. Apple users generally can only download apps from the iTunes Store, which would appear to easily block Netflix from participating in that market. Apple Arcade is a little different, as it’s an All You Can Eat model for $5 a month, and does not allow in-game purchases in order to keep it a premium service. Similarly, Android users download their apps from the Play Store; another roadblock to Netflix’s plan to enter that market.

Apple Arcade is considered a top contender among new gaming services, thanks to the company’s lock on iOS and the App Store.

Entering any portion of the market will definitely mean Netflix will have a fight for market share with established companies that have a certain amount of control over the market, whether it’s access to mobile gaming, licensing for Sony and Xbox devices, or Microsoft’s exclusive control of DirectX.

For example, Apple has been involved in a high profile clash with Epic Games, the creator of the hugely popular Fortnite franchise, and has been explaining in court why it doesn’t allow app companies to sell their own subscriptions on the App Store, even though it allows Netflix to sell TV subscriptions. Emails released during the hearing revealed that Apple did, in fact, try to keep Netflix from offering in-app purchases, but doing the same with downloaded apps would be a much different story.

So, what does Netflix have going for it as it girds the company for battle? In a word, numbers. Netflix had 204 million subscribers as of January this year, whereas Apple Arcade had about 12 million and even Microsoft’s Game Pass has 23 million. Adding gaming to the company’s subscription services could allow Netflix to become a very big player in a very short time, as long as the company can solve the question of where it gets content, and how the business model will work.

 

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