M+E Connections

Netflix is jumping deeper into the interactive game category as part of a “multi-year effort” in which it will “start relatively small,” Greg Peters, the company’s COO and chief product officer, said July 20 during the Netflix quarterly earnings webcast.

In the company’s letter to shareholders for the second quarter (ended June 30), Netflix said it is in the “early stages of further expanding into games, building on our earlier efforts around interactivity” that included the movie Black Mirror: Bandersnatch and Stranger Things games.

“We view gaming as another new content category for us, similar to our expansion into original films, animation and unscripted TV,” Netflix said, adding: “Games will be included in members’ Netflix subscription at no additional cost similar to films and series.” At first, Netflix will focus mainly on games for mobile devices, it said.

The company is “excited as ever about our movies and TV series offering and we expect a long runway of increasing investment and growth across all of our existing content categories,” it noted. But it added: “Since we are nearly a decade into our push into original programming, we think the time is right to learn more about how our members value games.”

Offering more color during the webcast, Peters said the company sees this “as an extension of the core entertainment offering that we’ve been focused on for the last 20 years…. So just as we’ve continuously expanded the nature of our offering by adding new genres, unscripted, film, local language programming, animation, on and on, we think we have an opportunity to add gains to that offering and deliver more entertainment value to our members through that. And similar to what you’ve seen in that trajectory when we’ve added a new genre, that’s what we expect will happen with games.”

In games, he said: “We’ll learn. We’ll grow. We’ll refocus our investment based on what we see as working, and we’ll just continuously improve based on what our members are telling us is working. But I’m really excited about a bunch of different ways that I think that we can provide an offering here that is differentiated from what’s out there already.”

The first way it will do that will be with the intellectual property that Netflix creates, he said, explaining: “We are in the business of making these amazing worlds and great storylines and incredible characters. And we know the fans of those stories want to go deeper. They want to engage further. They actually want to direct a little bit where their energy goes. And what’s great about interactive is, first of all, you can provide universes that just provide really significant amounts of time that people can engage in and explore. They can also provide a little bit of intentionality. Where do they want to explore? What characters? What parts of the world? What parts of the time lines? There’s just a lot of exciting things that I think we can do in that space.”

The Netflix subscription model, meanwhile, “yields some opportunities to focus on a set of game experiences that are currently underserved by the sort of dominant monetization models and games,” he noted, adding: “We don’t have to think about ads. We don’t have to think about in-game purchases or other monetization. We don’t have to think about per-title purchases. Really, we can do what we’ve been doing on the movie and series side, which is just hyper laser-focused on delivering the most entertaining game experiences that we can.”

Netflix is “finding that many game developers really like that concept and that focus and this idea of being able to put all of their creative energy into just great gameplay and not having to worry about those other considerations that they have typically had to trade off with just making compelling games.”

Explaining why it’s focusing initially on mobile games, he said: “We think mobile is a great platform for games. Clearly, it’s very mature. It’s got great enabling technology, tools, a great developer community and the vast majority of our members have phones that are capable of great gameplay experiences. So it sort of checks all of those boxes.”

However, he said: “Ultimately, we see all of the devices that we currently serve as candidates for some kind of game experience. We’ve actually been delivering lighter-weight interactive experiences on TVs and TV-connected devices for some time. And you can call those games, you can call them interactive experiences, but obviously, they all exist on a spectrum. And we’re going to keep innovating in that space, and we feel like there’s a rich opportunity to continue to deliver and advance the technical capability to improve the quality of game experiences we can deliver across the range of devices.”

Netflix plans to be “very sort of experimental and try a lot of things in this space,” he noted, pointing out: “A lot of what we have to do right now is just focus on learning…. So we’re going to try a bunch of different games through a variety of different mechanisms to see what’s really working for our members. Part of that will be games that extend our IP. We think that’s a really rich, rich space, so that’s very much part of our long-term thesis.”

The company will also “try standalone games” but is convinced that the “success of this initiative is about great games fundamentally, and those can come from a variety of different sources.”

He also envisioned a time when “we’ll see a game that spawns a film or a series,” calling that an “amazing place to get to and really see the rich interplay between these sort of different forms of entertainment.”

Netflix also plans to do game-related licensing because that is a “great way to increase the volume of the offering that we have at the start to learn more quickly,” he went on to say, adding: “As our internal production sort of scales, we can focus the energy on what we’re learning in that regard.”

The company will measure the success of its games much like it measures adding movies and TV shows to its service in that those additions are designed to be “compelling to members” and help retain them as subscribers, he said. “Obviously, if we are delivering more value there, then members stay with us longer.”

Streaming Trends

Netflix still sees a lot of growth opportunities in its core business of streaming movies and TV shows.

“It’s still early days in pretty much every market around the world,” according to Spencer Neumann, Netflix CFO. “We’re roughly 20 percent penetrated in broadband homes, and we talked in the last call that there’s 800 [million] to 900 million either broadband or Pay TV households around the world outside of China,” he said in the quarterly webcast. “As we continue to improve our service and the accessibility of our service, we don’t see why we can’t be in all or most of those homes over time, if we’re doing our job,” he noted.

Also, “if you look at the range” in the Asia-Pacific region “we’re only roughly 10 percent penetrated,” he said. In many markets, linear TV continues to attract a large number of viewers, he noted.

Streaming represents only 27% of U.S. TV screen time, compared with 63% for linear TV, Netflix said in the letter, citing Nielsen data. Based on the same study, Nielsen estimated that Netflix represents just 7% of U.S. TV screen time, it said. “Considering that we are less mature in other countries and that this excludes mobile screens (where we believe our share of engagement is even lower), we are confident that we have a long runway for growth,” it said, adding: “As we improve our service, our goal is to continue to increase our share of screen time in the US and around the world.”

Q2 Results

Netflix Q2 revenue increased 19% from a year ago to $7.3 billion, while operating income rose 36% to $1.8 billion. Profit grew to $1.4 billion($2.97 a share) from $720 million ($1.59 a share).

The company finished the quarter with over 209 million paid memberships, slightly ahead of its forecast, it said. “COVID has created some lumpiness in our membership growth (higher growth in 2020, slower growth this year), which is working its way through,” it noted in the letter to shareholders.

Netflix added 1.5 million paid memberships in Q2, slightly ahead of its 1 million guidance forecast. But that was down from 10.1 million additions in Q2 last year.

Revenue growth was driven by an 11% increase in average paid streaming memberships and 8% growth in average revenue per membership, according to Netflix.

Other New Initiatives

Netflix recently globally launched Play Something on TV, a new feature that it said in the letter “lets Netflix do the work when you don’t feel like choosing what to watch.”

The company also recently “improved the Netflix download experience to enable you to start watching a show or film even if it hasn’t finished downloading,” it said. Once subscribers reconnect, they can complete the partial download and keep watching, which also helps them avoid exceeding their data limits.

Netflix also recently expanded its low-cost mobile-only plan to an additional 78 countries across South East Asia and Sub-Saharan Africa.