M+E Connections

Interactive games won’t be a significant contributor to overall Netflix business for a long time and we shouldn’t expect the company to start quickly acquiring game developers despite its recent purchase of Night School Studio, according to company executives.

Netflix “will be opportunistic” when it comes to additional game company M&A activity after acquiring Night School, its first such purchase, in September, Greg Peters, COO and chief product officer, said Oct. 19, during his company’s earnings call for the third quarter (ended Sept. 30).

“So I would say don’t expect us to go on a tearing, buying spree or something like that. This will be one of the tools that we use, and we’ll use it opportunistically when we find a great opportunity out there,” he explained.

That is what Netflix did with its acquisition of Night School, Peters said. “We’re tremendously excited about that team in specific because… the core of what they’ve done is to try and explore story and narrative essentially as the central game mechanic. And we think that fits really, really well with what we’re trying to do. And so it’s been great to get them on board and involved and to hear their thoughts and ideas. And I expect it will be a sort of a rich partnership over years to come.”

Underscoring the company’s strategy on game company acquisitions, Spencer Wang, VP of finance and investor relations, noted: “As you can tell from our track record, we are fairly selective when it comes to M&A. But, you know… when an opportunity presents itself, where we feel like we’re aligned with the company, I think that’s an opportunity we’ll take.”

Still Very Early Days

Netflix has just “begun testing our games offering in select countries,” it said in its latest letter to shareholders.

Netflix is still “learning” when it comes to the interactive game category, according to Spencer Neumann, the company’s CFO. Echoing comments made by company executives on its prior earnings call, in July, he said it will take “not just months, but years of building” by Netflix in this category. “Even in our most kind of ambitious success scenario, it will be years, we would expect, before this could have a meaningful impact on our business,” he noted. While he was “very excited for the long term” about the game business for Netflix, he added: “We’re going to be patient. We’re going to move quickly and learn quickly, but this is a multiyear build.”

Netflix is still “incredibly early” in its game strategy, Peters noted. “Mostly what we’ve done to date is about essentially making sure that all of our systems are working as we expect. So it’s really about proving to ourselves that we can do the delivery in a way that we want. And we’re building all the systems around it…. We’re really just sort of checking off the first bits of that process, and that’s going well. We’ve got a positive trajectory. But I think what you’re trying to get to… is all the sort of much more exciting questions that come behind that, which means like what’s the business value? How do we think about engagement? What are our specific genre or our title performance. We’re still many months and really, frankly, years into learning incrementally about all those details. So really more to come there.”

The Game Strategy

Netflix is “going to learn our way… just as we have in the other content categories that we’ve served,” according to Peters. “We’ll learn by basically putting stuff out there and then having our members tell us what’s working and what’s not. But we’re excited about the idea that by taking away what we see as distractions from the core enjoyment experience associated with other models like advertisements or in-app monetization, per-title costs that we can really give our members a much easier, direct enjoyment experience with games, just like we have with TV shows and movies.”

There is a “great flip side to that coin as well, which is that creators can really put all of their energy, everything they’re excited about, into making that maximal enjoyment experience for the users, the players of those games, without having to worry about those other things that they have to in other models in terms of monetization,” Peters explained.

Another area that Netflix is looking to explore with games is to connect it “with the other work that we are doing,” Peters noted. “We’re creating all these amazing universes and worlds and characters and storylines, and we can attach to the passion and fandom that our members have on viewing those on the video side with game experiences and allow them to go deeper and explore spaces that they wouldn’t have otherwise seen on the video side. And so we really think there’s a good connection and synergy there. And over time, we’ll try and bring those closer together and sort of let those two worlds more influence each other and have a more direct connection.

That, however, is “something that is years in the making [and] we’ve really got to iteratively explore, and none of us know exactly what that will look like because we’ll have to sort of find our way as we go,” Peters added.

One potential offering three years down the road, explained Reed Hastings, Netflix co-CEO, is “some future Squid Game is launching and it comes along with an incredible array of interactive or gaming options and it’s all built into the service.” He conceded that Disney is “still ahead of us in some of those dimensions of putting that whole experience together.” But he said: “Boy, are we making progress,” and Netflix is eyeing “kind of closing that gap” over the next three to five years

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

Regarding the company’s overall mobile initiatives, Peters said Oct. 19 that the “strategic priority” of Netflix is to “meet our members where they’re at, and the vast majority of our members engage with us on a mobile device.”  Therefore, when subscribers are “out and about,” the company wants to make sure “they have the opportunity to get a great Netflix experience with their mobile phone,” whether it be to view trailers, watch short Fast Laughs comedy clips, or to pick up where they left off when leaving their house in the middle of an episode of its popular new series Squid Game, he explained.

Q3 Results

“After a lighter-than-normal content slate in Q1 and Q2 due to COVID-related production delays in 2020, we are seeing the positive effects of a stronger slate in the second half of the year,” Netflix said in its new letter to shareholders.

In Q3, Netflix grew revenue 16% from a year ago to $7.5 billion, while operating income jumped 33% to $1.8 billion and profit rose to $1.4 billion ($3.19 a share) from $790 million ($1.74 a share).

Netflix added 4.4 million paid net subscribers in Q3 (vs. 2.2 million in Q3 a year ago) to end the quarter with 214 million paid memberships, it said.