M+E Connections

Netflix is seeing some early positive signs for its new interactive game business that launched globally in November for Android and iOS mobile devices, according to the company.

Subscribers can now “discover and launch games from within the Netflix mobile app,” the company pointed out Jan. 20 in its shareholder letter for its fourth quarter (ended Dec. 31).

“Since launch, we released an additional five games, bringing the total to ten for 2021,” Netflix said.

“It’s still very early days but we’re pleased with our progress,” the company noted, adding: “In 2022, we’ll expand our portfolio of games across both casual and core gaming genres as we continue to program a breadth of game types to learn what our members enjoy most.”

Growing Active Users

During the company’s quarterly video interview, Greg Peters, COO and chief product officer, said: “It’s tremendously exciting to get to this point because we basically have been building the plumbing and all of the technical infrastructure just to get to the point where we can do this, which is consistently launch games globally to all of our members.”

At this point, Netflix is “now really getting to learn from all those games what are the discovery patterns, what are the engagement patterns, how are they performing, what do our members want from games on the service,” he said.

What the company is seeing initially is, “not surprisingly, we have a growing number of monthly active users [and] daily active users on these games,” he noted. “We’re generally seeing good growth in that regard.”

At the same time, Netflix has been “building in parallel what I’m super excited about… which is this sort of internal development capacity, our own game studio,” he pointed out. “We’ve been hiring some incredible talent that brings a set of experience to this process.”

Additionally, “we’ve done an acquisition in this space,” he noted, referring to the company’s purchase of Night School Studio in September, which marked the first acquisition for Netflix in the space.

“That now allows us to incrementally, gradually over a period of time, get to [a point] where we get to deliver… interactive experiences that are tied to the IP that we’re excited about, that are timed with it,” he explained. “And that I think is really when you’re going to see a next level of unlock around the value we can deliver to members.”

M&A Plans

Peters was asked by an analyst if it would be more efficient for Netflix to buy its way into some well-known game titles to anchor its slate of titles. Her question came  just two days after Microsoft announced it was acquiring Activision Blizzard in an all-cash transaction valued at $68.7 billion to “accelerate the growth in Microsoft’s gaming business across mobile, PC, console and cloud and… provide building blocks for the metaverse.” The deal will make Microsoft the world’s third-largest game company in revenue, behind Tencent and Sony.

The question also came only 10 days after Take-Two Interactive said it was buying mobile game maker Zynga in a cash and stock deal valued at $12.7 billion.

“Why isn’t Netflix participating in big acquisitions given your aspirations in gaming?” the analyst asked Peters.

“It was exciting to see the activity in the space,” he responded. “I think, to some degree, it’s an endorsement of the core thesis that we have around subscription being a great model to connect consumers around the world with games and game experiences.”

Netflix is “open to licensing, accessing large game IP that people will recognize,” he noted. “And I think you’ll see some of that happen over the year to come. But we also see” opportunity in taking Netflix franchises or “big titles, let’s call it, that we are excited about and actually develop interactive experiences that are connected to those,” he explained. “We see a huge long-term multiyear opportunity in that, too.”

When it comes to games, “we’re very open,” he said, adding: “We’re going to be experimental and try a bunch of things. But I would say the eyes that we have on the long-term prize really center more around our ability to create properties that are connected to the universes, the characters, the stories that we’re building in other places and sort of magnify that value for the fans of those stories.”

His comments were in line with what he said on the prior earnings call, when he explained that Netflix “will be opportunistic” when it comes to additional game company M&A activity after acquiring Night School but cautioned: “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.”

Price Increase, Optimism Despite Competition

Netflix executives also said on the call they continued to be optimistic about their business despite growing competition in the video streaming sector. They also discussed the latest U.S. subscription price increase that Netflix announced Jan. 14.

The company boosted its monthly pricing, with the cost of its standard plan that allows for two simultaneous high-definition streams increasing to $15.49 from $13.99. The basic plan increased by $1 to $9.99, while the premium plan jumped $2 to $19.99.

“You can anticipate” the pricing changes to be “flowing through over the next quarter, the quarter that we’re in right now, in Q1,” Peters said. “We actually haven’t actually rolled it out to any customers yet,” he noted.

But, with price changes it’s made in the past couple of years, the company has seen that “if we’ve done a good job investing the members’ subscription fees that they paid us into better stories, more great storytelling, bigger movies, more variety, then when we come back and ask them occasionally for a little bit more to keep that sort of cycle going, then they’re generally willing to do that,” he explained.

Meanwhile, “when we look at that sort of core theory and we look at also the competitors,” including Disney Plus, “their ability to grow even as we’ve been growing as well, I think it’s a really strong endorsement for the core idea that consumers around the world are willing to pay for great entertainment,” he said.

Q4 Results

The price of Netflix shares declined after the company reported net subscriber additions for Q4 that were lower than expected and provided a forecast for new subscriber additions that was weaker than analysts expected also.

Netflix finished Q4 with 222 million paid memberships, with 8.3 million paid net additions vs. the 8.5 million the company had projected.

Revenue grew 16% from Q4 a year earlier to $7.7 billion behind a 9% increase in average paid memberships. Net income grew to $607 million ($1.33 a share) from $542 million ($1.19 a share).

Netflix boasted that it “achieved several milestones” in 2021, including the “biggest TV show of the year (Squid Game), our two biggest film releases of all time (Red Notice and Don’t Look Up) and Netflix was the most Emmy-winning and most nominated TV network and the most Oscar-winning and nominated movie studio of 2021.”

‘The Netflix Flywheel is Still Working’

The company reported an “essentially in-line 4Q result (with better than expected U.S. subscriber results offset by worse than expected Latin American results) and worse than expected 1Q paid subscriber and 2022 financial forecasts (although the latter appears mostly related to dollar weakness),” according to Jeffrey Wlodarczak, principal and entertainment/interactive subscription services analyst at Pivotal Research Group.

“Our view is that the pandemic pulled forward massive amounts of demand for numerous players including Netflix and across the board it is taking longer than expected for gross subscribers to normalize,” he said in a research note.

As for Netflix stock, he said: “It would not surprise us even off a substantial decline in the pre-market, that NFLX stock may be dead money amidst muted results in 1Q and the seasonally weak 2Q and the likely need to prove out that there is still significant growth left in streaming.”

However, he added: “In the end we think the Netflix flywheel is still working. It is just operating at a slower pace given the massive pull forward of demand enabled by pandemic shutdowns and over time we expect normalization in subscriber results and for the stock to work.”