Netflix is Building a Digital Disneyworld with Their Move Into Gaming
Netflix announced this week that it will get into video games. Creativ Strategies predicted this last year when gaming saw massive gains during the lockdown. Reed Hasting’s hinted at the move himself when he stated that video games were a bigger competitor than other streaming services. An excerpt from our 2020 post – Virtual Realities – 4 Ways Covid-19 Will Forever Change Media & Entertainment:
We will see massive gains by the video game industry this year [2020]. This squarely puts gaming as the best positioned entertainment medium in this environment. If you are a traditional media brand, you better get into gaming. Fast. There’s a reason Reed Hastings, CEO of Netflix said Fortnite is a bigger competitor than HBO. I’m predicting a studio and gaming firm combine in the next two years. If Netflix buys an indie game studio like Jackbox games, someone give me a dollar.
However, the market lacks a distinct understanding of why this is yet another bad-ass move from the Netflix team. The short answer is iconic IP sells. The complex answer is gaming is the most valuable entertainment medium and Netflix is well positioned to capitalize on that trend.
How to Make Money Off Your Intellectual Property (IP) - Revisiting Disney’s Economical Model
The Disney business is essentially threefold.
1. Launch massive franchise titles in movie theaters
2. Market the hell out of them so everyone knows about it
3. Capitalize off highly recognizable IP across multiple channels including merchandise, parks, TV, publishing, music, and more recently video games
Disney is a case study in how initial investments into big, tentpole movies, many of which are net profit losers, pay dividends when your organization has the infrastructure to capture downstream revenues off recognizable, beloved characters and IP. Over the last year, Netflix has been quietly building their merchandising chops, opening an online store to sell limited-edition apparel as well as hiring merchandise licensing professionals to sell its IP rights to third party manufacturers and developers.
A common consumer misconception is a Micky Mouse doll or Stranger Things T-shirt is made by Disney or Netflix respectively. More commonly, the IP rights are bought by a third-party manufacturer specializing in a specific type of product like apparel, auto, home goods, textiles. The manufacturer (licensee) pays the rights holder (licensor) a percentage as a royalty for every unit sold. Rights holders love this because it’s essentially found money without additional investment while product manufacturers capitalize on recognizable IP to sell more products. A win-win.
This licensing opportunity also extends to video games. The dumber Wallstreet analysis out there says this is a bad move by Netflix because video games are capital intensive, sophisticated, and ‘difficult’ to pull off. They neglect to mention all the third-party mobile game companies like Niantic, Scopely, and Machine Zone whose business models revolve around licensing iconic IP and creating brilliant mobile games off the back of it. Most legacy media companies and even game publishers offload the actual physical production of the game onto third party game studios. Licensing their IP to a third-party game studios offers Netflix one high margin, low capital way to leverage partnerships to get into gaming.
Netflix’s Tech Stack is Ideal for Gaming
Let’s talk about why some Wall Street analysts are so wrong about Netflix’s “ill-advised” move into gaming. To distribute a modern game in today’s market you need:
1. A cloud-based solution to get games to consumers where they live. Gaming has moved to the cloud. Physical game discs have gone the way of music CDs, video cassettes, and cable packages. People want to download games remotely.
2. High fidelity video and audio graphics capabilities. You need a lot of processing power to run modern, graphic intensive games. More and more of this processing power has been removed from physical systems, the hardware in your game console or phone, and moved to cloud based drives which happen off your device.
3. Massive distribution channels to popularize the games. Many successful game studios have deals with game publishers like EA, Ubisoft, Steam, and Microsoft to get their games to the masses. These publishers offer platforms to download games and marketing budgets to build awareness around them.
Netflix has all three of these capabilities already. The streamer hosts its platform on one of the most massive cloud storage systems in the world. It already streams massive amounts of high-quality video and audio and has capacity for more. Lastly, Netflix has over 200 million registered users that it can push new content to, including games.
Wall Street naysayers will say Netflix still lacks the experience for creating games. I say partnerships, partnerships, and more partnerships. As hinted at above, I believe Netflix will operate more as a game publisher while offloading most of the development work to established studios with capabilities across mobile, console, and PC. This is common practice, even amongst studios themselves when porting games across hardware. Netflix most recently signed a content distribution agreement with Sony for their films and TV. I wonder what else Sony makes… oh yeah, the PlayStation. Another prediction, we’ll see a larger partnership between Netflix and Sony for their gaming portfolio, allowing Netflix IP to appear in PlayStation games and PlayStation IP to appear on Netflix.
Source eMarketer.
Lastly, analysts have been skeptical about the controller Netflix would have to make. I say let them use their phones. Half of millennial Netflix viewers stream video on their mobile device.
That’s roughly 80-100 million people with your app on their mobile device. One software patch could transform your mobile device into a mobile controller that links to the Netflix app on your TV. Suddenly you have a gaming console, powered by the cloud, without any hardware whatsoever. Now that’s revolutionary. Another prediction, Netflix or another tech-first company like Roku will create a mobile controller that links to their TV app, allowing consumers to play games on both mobile and their home entertainment systems.
Netflix’s Digital Park is the Future of Cloud-Based Gaming
Netflix’s burgeoning IP licensing division, ideal tech stack, and massive distribution consumer network will allow Netflix to leap into the gaming industry as one of the largest game publishers. It will bolster ongoing partnerships with Sony to leverage their developers, IP, and platforms, while foster new mobile first partnerships with experienced developers to leverage development expertise.
Cloud-based computation offers massive potential for future gaming endeavors. When you can offload computation to cloud servers, the hardware necessary to run complex, graphics intensive games vanishes. Mobile controllers straight from an app will allow future game publishers like Netflix to offer immersive gaming experiences without any hardware. Simply turning on your TV and opening the corresponding app will provide players with immersive AAA gaming experiences.
The result, a digital Disneyland, in which Netflix’s IP extends into digital e-commerce and video game experiences. Don’t believe the excel pushing, Wall Street analysts who have never worked in the businesses they are providing guidance on. Netflix is going to push the boundaries of cloud-based gaming, everyone else will follow.