Netflix CEO Reed Hastings famously said that Netflix competes against Fortnite more than HBO and demonstrated that on Wednesday by hiring Mike Verdu as the Vice President of Game Development. Mr. Verdu previously led Augmented Reality/Virtual Reality efforts at Facebook, and also led mobile gaming efforts at industry leaders Electronic Arts, Kabam, and Zynga.   

According to Bloomberg,    

“The idea is to offer video games on Netflix’s streaming platform within the next year. The games will appear alongside current fare as a new programming genre — similar to what Netflix did with documentaries or stand-up specials. The company doesn’t currently plan to charge extra for the content.”  

The games would reportedly only be playable on mobile devices, which would fit with Mr. Verdu’s background from mobile gaming. Video games will just be an extra tab available to all Netflix users and will serve as an additional entertainment option alongside all of Netflix’s other content.

So far, Netflix has dipped its toes into the video game industry with efforts such as:  

  • Live adaptations of video games such as The Witcher, and Assassin’s Creed  
  • Interactive shows such as Black Mirror: Bandersnatch, and Carmen Sandiego: To Steal or Not to Steal  
  • Content on other video gaming platforms such as a playable Starcourt Mall from Stranger Things on Roblox  
  • Licensing its intellectual property to 3rd party developers such as Stranger Things 3: The Game   

This announcement is yet another step forward.   

Why does Netflix want to make video games?  

Video games are the fastest growing form of entertainment. Even before COVID, people of all ages and demographics have been playing more video games. Furthermore, younger people such as millennials and Gen Z increasingly prefer playing (and watching other people play) video games to watching TV and sports. On one level, Netflix simply wants to be where the wind is blowing.  

More importantly, the video game and movie/TV industries have been converging and will continue to do so. Video games can be viewed from a similar perspective as interactive movies, and video games allow the player to truly dive in and explore a world in a way that cannot be replicated by film. As Netflix executive Greg Peters puts it:   

“We’re in the business of creating these amazing deep universes and compelling characters and people come to love those universes and they want to immerse themselves more deeply and get to know the characters better and their back stories and all that stuff. And so, really we’re trying to figure out what are all these different ways that we can increase those points of connection, we can deepen that fandom. And certainly games is a really interesting component of that.”   

As such, many commentators believed Netflix’s aim is to replicate what they’ve done in media and create a “Netflix of Games” with a wide selection of video games that could be immediately streamed over the internet.   

However, based on what we know about Netflix’s plans, I think those who are hoping to play The Witcher directly through Netflix in the near future are likely to be disappointed. The strategy is not to create a “Netflix of Games” like XBOX Game Pass, but simply just to add mobile games that can be played on your phone through the Netflix app with the purpose to increase engagement. Deep immersive games as described by Peters would likely continue to be made by 3rd parties on other platforms.   

This decision to focus on mobile makes a lot of sense for many reasons:   

Firstly, mobile games are technologically easier for Netflix to create and maintain. Gamers will not require any special hardware other than their phone, and input lag and latency are less of an issue with simpler tap-and-play games. Netflix understands better than anyone the technical challenges of streaming premium video game content at an acceptable latency and most subscribers of Netflix who play video games would already own a console or gaming PC. Furthermore, as many people have pointed out, Netflix does not have the knowledge or capabilities to make premium AAA games such as Call of Duty or Grand Theft Auto. By focusing on mobile games, Netflix can build up its publishing capabilities and learn about the games market before moving up and investing the capital to create larger, more sophisticated games as technological advances for game streaming improve.  

Next, focusing on mobile allows Netflix to compete more effectively against a new set of competitors. As Matthew Ball explains, there are different types of content for different occasions. Sometimes you want to sit down and immerse yourself in Game of Thrones. Other times, you just want to passively watch a sitcom or reality show while washing the dishes. Each type of content has a different competitive set for Netflix: HBO competes for the premium immersive time and Disney competes for your family time. In developed markets, time spent watching Netflix on a phone most likely occurs in situations to pass time such as waiting for the doctor, riding public transportation, or during a particularly boring class. As such, the primary competitive set for Netflix for mobile is companies like TikTok,  YouTube, Instagram and Candy Crush, and adding mobile games to the portfolio would help deepen engagement against such competitors. This is particularly important because younger generations increasingly prefer to consume media on their phones.  

Lastly, the economics should be very attractive for Netflix. Mobile games are very cheap to create with upfront costs that can be under $1 million, with engagement of hundreds of hours for a well-designed game. Although Netflix won’t explicitly be charging for games, Netflix’s subscription pricing power is tied to the engagement of its members in terms of time spent on Netflix, and mobile video games are a low-cost way for Netflix to increase engagement.  

In addition, unlike the rest of the mobile gaming industry, Netflix can distribute its games without any user acquisition costs. Netflix’s key competitive advantage is that, as with YouTube, it is a destination where people browse for something to watch. Through the Netflix app and recommendation algorithms, Netflix can distribute the games it produces to a captive audience that is already browsing on Netflix for entertainment. By adding video games to the core Netflix rather than as a separate app, Netflix has the flexibility to move slowly without the need to create an immediate hit to drive interest and downloads.  

What will the games look like?  

To start, Netflix will likely create simple, interactive, story-driven games that can be played without in-app purchases or advertising. The goal will be to provide delightful yet simple experiences that currently don’t exist on mobile today.  Given the economics of mobile apps, most successful mobile games tend to be repetitive experiences that are engineered to keep the player engaged and spending money or watching ads. Since Netflix does not intend to directly generate revenue from the games, developers can be free to fulfill their creative vision without worrying about the economic model of the game. As such, Netflix is well positioned with its 200 million subscribers (and even greater number of users) to bring a better playing experience to the market.