Netflix ( NFLX -2.64% ) isn’t just acquiring filmed content these days. The leading premium streaming service is also collecting gaming companies, and it probably won’t take long until investors see all of the pieces coming together.
The company turned heads last summer when it hired video game executive Mike Verdu to head its new effort to provide new diversions for its subscribers. It didn’t take long for Verdu to get going. By November Netflix officially entered the mobile gaming market, and by the end of 2021 it had 10 different apps based on its properties available for Android and iOS devices.
Netflix is just getting started. This month alone it has now acquired two small developers. It kicked off March by announcing the purchase of Finnish mobile game maker Next Games. This week it revealed that it’s snapping up Boss Media Entertainment, the company behind the popular strategy role-playing game Dungeon Boss. Why is Netflix getting its head into the game when it’s doing so well serving the filmed content streaming market? It’s a smarter move than you probably think, but let’s play this development out.
Like a Boss
It’s become pretty clear that Netflix is kingmaker for content, and it’s only natural for it to find new ways to cash in on hit properties. It’s not much of a bet so far. It has focused on small developers with thin but high-quality portfolios that it can acquire cheaply. You don’t have to guess the endgame for Netflix. Just check out the final paragraph of Thursday’s official blog entry announcing the Boss Media Entertainment acquisition: “We’re still in the early days of building great game experiences as part of your Netflix membership. Through partnerships with developers around the world, hiring top talent, and acquisitions like this, we hope to build a world-class games studio capable of bringing a wide variety of delightful and deeply engaging original games — with no ads and no in-app purchases — to our hundreds of millions of members around the world.”
The first sentence confirms what Netflix has been saying in recent months. This isn’t a new direct revenue stream, as Netflix plans to include these gaming experiences as part of its Netflix membership. It’s acquiring the talent that can make games based on its hit shows that lend themselves to gameplay — think Squid Game or Stranger Things — so it’s hiring these developers mostly for their abilities to create games than for the value of their existing content libraries.
Pointing out that these games will have “no ads and no in-app purchases” is important. When Netflix announced the acquisition of Next Games it mentioned that 95% of the mobile game developer’s revenue stemmed from in-app purchases. A lot of gaming apps fall under the Next Games “freemium” model where they put out games for free and then monetize them by the in-app purchase of virtual goodies that enhance gameplay. Netflix doesn’t want any of that, just as it has resisted slapping ads on the platform’s video streams when many of its smaller rivals have used them to offer customers a lower-cost subscription option.
Netflix doesn’t play that game. It would rather raise prices — including an 11% pricing increase to domestic users earlier this year — than have its subscribers sit through ads. It’s hard to argue with the logic. Netflix expects to have more than 224.3 million streaming subscribers worldwide for the current quarter that ends next week.
The majority of those subscribers probably don’t care about mobile games, but this is a play for driving retention rates higher for those who do play, as well as making its platform more attractive to the young audiences that dabble in digital diversions. It may even spawn new gamers. You may not care for casual games, but if you’re a fan of Ozark or Bridgerton don’t you think you’d at least entertain a free app download of a game that takes you deeper into the cinematic experience with characters you already know and care about?
Netflix knows exactly what it’s doing. It spends more on content than any other platform, and it has more years of consumption data than anybody else. Just because no one else is adding mobile diversions based on their hit shows and films doesn’t mean that Netflix is fighting an uphill battle as the pioneer. As the class act among streaming services stocks it knows exactly what it stands to gain here in terms of attraction and retention of its premium-priced platform. It’s playing games with you, but only because it already knows it’s going to win.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.