Why Netflix’s Expansion Into Gaming Is (Not) A Good Strategy
There are plenty of reasons why Netflix getting into gaming is a bad idea.
With competitors like Disney+ and Amazon Prime stealing market share, Netflix is seeing a sharp slowdown of their growth after their Covid-19 stay-at-home boost in 2020. To counter this slowdown, Netflix announced on July 20, that it will start offering mobile video games to its subscribers.
And on August 26 they have actually started by testing two Android titles in Poland: Stranger Things: 1984 and Stranger Things 3. While it is understandable that they seek alternative ways to attract new customers, we can ask whether or not it is a good idea to enter the gaming industry.
Why It Is Not A Good Idea
There are plenty of reasons why Netflix getting into gaming is a bad idea.
First, there is a big difference between two categories of entertainment: passive (watching sports or listening to music) and active (playing sports or practicing music). Netflix belongs to the first category, video games to the second. They are different ballgames and hard to mix.
If I want to watch a movie or series, I want to be passive and go to Netflix, or Disney+ or Amazon Prime. If I want to play a video game, I want to be active and switch on my Playstation, Xbox or Nintento Switch, or pick any game on my smartphone. Given that our brains works with categories, and that Netflix is so strongly invested in the passive category, we can expect consumers to have difficulties crossing the boundaries.
Netflix’s interactive episode of Black Mirror, Bandersnatch shows that mixing the two can lead to an in-between experience that is neither. It kind of works, but it doesn’t really engage. It’s neither active, nor passive. Netflix does have other interactive titles, but their number (14) is very small.
While good interactive stories are also incredibly hard to create, this low number suggests that they also have come to conclude that interactive TV isn’t the big thing they may had hoped—and thus that mixing video with interaction may not be the best idea.
Second, video games don’t fit Netflix’s core competence. Netflix is a single-product company that is extremely good at doing what it does: offering a large volume of high-quality series (plus some movies) for a fixed price per month. With its own productions, for example, it won no less than seven Academy Awards this year, more than any other distributor. Producing and distributing video games asks for very different skills, and any activity deviating from their core competence is a risk.
It seems unlikely that such competence can be developed in-house. Many others have attempted to enter the red ocean of video gaming, but only very few succeed. Therefore, if Netflix were truly serious about adding video games to their portfolio, the more effective route would probably be acquiring one or more gaming studios that produce exclusively for Netflix.
Third, competition is vast. While competition in video streaming is growing, Netflix has the first-mover advantage and it is still the default. While it may not yet have become for video streaming what Google has become for search, “Netflixing” is becoming a verb like “Googling.”
In video games, though, Netflix is a very late new entrant, facing tough competition by, amongst others, Sony, Tencent, Nintendo and Microsoft. Unless Netflix finds a truly unique and differentiating angle, it is unlikely that they will achieve any major position in gaming.
Finally and more generally, the odds are against diversification. As Al Ries and Jack Trout show convincingly in their classic, The 22 Immutable Laws of Marketing, diversifying is mostly unsuccessful and a bad idea for the large majority of companies. Of course, there are exceptions—Sony and Microsoft being amongst them—but the number of failures by far outweigh the number of successes.
So, as many companies have learned the hard way, having built up a successful brand in one industry is by no means a guarantee that it will also produce success in another. It is not impossible, but chances are slim.
Why It May Be A Good Idea Nevertheless
From the four reasons above we can conclude that it is most likely a bad idea for Netflix to diversify into gaming and try to compete with a new gaming offering. But, if we listen carefully to what Netflix is saying, this may or may not be exactly their plan or their rationale for getting into gaming.
As we can infer from Netflix’s Q2 earnings interview, Netflix is “a one product company with a bunch of supporting elements that help that product be an incredible satisfaction for consumers and a monetizing engine for investors” and, we need to “...think of [video gaming] as making the core service better. So lots of investment but not a separate profit pool. It's enhancing the big service that we have,” says Co-founder, Chairman, President and C0-CEO Wilmot Reed Hastings.
And as Gregory K. Peters, Netflix’s COO and Chief Product Officer adds, “we're really thinking about this as a core part of our subscription offering. And so we measure it very much like we do around the success of adding incremental movies or adding incremental series, which is that, ultimately, those are about like being compelling to members, having them engage and talk about it, having that be part of the social conversation that's out there.”
What we can infer from these explanations is that—as far as they can tell now—Netflix doesn’t see video games as a standalone offering, but as an integral part of their core product. While we have to guess a bit what they mean exactly with this, it could be either a good or a bad strategy.
It could be a good strategy if they see video gaming primarily as a marketing strategy. This is what Hastings seems to suggest by arguing that video gaming is “supportive” and Peters when he says that it is about “having [members] engage and talk about it” to foster customer acquisition and retention.
Also, the fact that they are testing the first games on Android now, rather than on their streaming platform, seems to suggest that gaming is not going to interfere with their core product. With this supportive role in mind, video games could be an interesting marketing strategy to generate more buzz around their movies and series.
It could be a bad strategy, though, if they see video gaming as part of their core business strategy. Peters’ remark that “we measure it very much like we do around the success of adding incremental movies or adding incremental series” points in this direction by seeing video games as something similar to adding new movies or series.
Netflix’s CFO, Spencer Adam Neumann’s says something similar in the same earnings interview. We should be hearing from Netflix “in terms of our investment into film, into television, extension into video games and hopefully, other content categories over time.”
Along these same lines, CEO Reed Hastings said two years ago in Netflix’s shareholder letter: “Our focus is not on Disney+, Amazon or others, but on how we can improve our experience for others,” and “We compete with (and lose to) Fortnite more than HBO.”
Thus, Netflix’s board seems to treat video games primarily as just another content category that they could add to their platform. In the light of the four reasons given above, diversifying into the video game industry may be a bad idea. Because video games are not simply another content category, they are a different ballgame that Netflix yet has to learn to play.
What Should Netflix Do?
Law 12 of Ries & Trout’s The 22 Immutable Laws of Marketing, to which I referred to above, is the Law of Line Extension. It reads: “There’s an irresistible pressure to extend the equity of the brand.” For their future success, let’s hope Netflix can resist the pressure and stick to their core.
Or, if Netflix truly wants to take a share in the video gaming industry, they may better leave it to others to handle that, and license some of their highly successful titles to one of the bigger players.
Along these lines, in 2019 Netflix lent their property Stranger Things to a video game studio Behavior Interactive for their multi-player horror game called Dead by Daylight. Amassing over 8 million views for the trailer alone, it shows that Netflix’s current properties have potential to be turned into games, if done right.
Dr Jeroen Kraaijenbrink is an accomplished strategy educator, speaker, writer and consultant with over two decades of experience bridging academia and industry. Drawing from cognitive psychology, humanism, Saint Benedict, and a wide range of other sources, he is the author of numerous articles on strategy, sustainability and personal leadership and five books: Strategy Consulting, No More Bananas, Unlearning Strategy, and the two-volume practical guide to strategy The Strategy Handbook. He is an active Forbes contributor where he writes about strategy, leadership and how to embrace the complexity and uncertainty of this world. Jeroen has a PhD in industrial management, teaches strategy at the University of Amsterdam Business School, and has helped many midsized and larger companies across the engineering, manufacturing, healthcare and financial services industries.