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Why Netflix, Inc. Should Jump Into the Video Game Market

Netflix should develop video games based on its original content, and lock those games behind a subscription paywall

By Luke Lango, InvestorPlace Contributor

Netflix stock nflx stock

Source: Shutterstock

First, let me be clear about one thing: Despite a recent TechRadar report that Netflix, Inc. (NASDAQ:NFLX) is preparing to stream video games, a Netflix spokesperson has since clarified that no such thing is happening. Instead, the company is expanding its interactive videos business and licensing Stranger Things for a video game that will appear on Telltale’s platform, not Netflix’s platform.

So let’s put the rumors to rest. You’re not going to see a Netflix video games section any time soon … but the company absolutely should get into games.

The “Netflixification” of video games is coming. It is called cloud gaming, and big video game publishers like Electronic Arts Inc. (NASDAQ:EA) are pouring a bunch of money into making the Netflix-like video games a reality.

Netflix shouldn’t get caught up in trying to make the Netflix of video games. EA and others will probably be better at doing that, anyway. But Netflix should create video games based on its rapidly growing and high demand original content portfolio, and lock those games behind a “Netflix Video Games” subscription paywall.

Doing so could add billions of dollars of value to the company. Here’s a deeper look:

The Netflix of Video Games Is Coming

Make no mistake about it. The Netflix of video games is coming soon to a smart TV near you.

Video game publisher EA recently revealed its vision for what they call “cloud gaming”. That vision includes a Netflix-like app installed on smart devices which allows you to stream and play games from any smart device. No bulky hardware. No video game purchases. Just an app and a subscription.

It truly is the Netflix of video games.

And it will be met with as much demand and find as much success as Netflix.

Even back in their golden era, movie DVDs never fetched more than $30. But today, video games are priced at over $50. And while people did buy more DVDs back in 2008 than they bought video games, total video game sales were actually greater than total DVD sales in 2008.

And that was before Netflix arrived with streaming.

Thus, the Netflixification of the video game industry provides a huge, $100 billion-growth opportunity over the next several years.

Original Video Games Are a Multi-Billion Opportunity for Netflix

Netflix would be wise not to try to build the Netflix of video games, despite the huge growth opportunity the market presents. Video game publishers like EA will likely be far better suited to deliver such a service, as they own a majority of the video game content out there.

But one way for Netflix to participate in this market without outright building the Netflix of video games is by creating its own games.

The strategy is pretty straightforward. Netflix has developed a robust and still rapidly growing portfolio of original content which consumers clearly love. A lot of that content translates well into a video game story-line, such as Stranger Things. Thus, Netflix should start creating video games based on its original content, lock those video games behind an additional paywall called “Netflix Game”, and let consumers decide if they want to pay for those games.

Chances are high that they will. Netflix’s original shows have generated a lot of buzz. Video games of the same name would generate just as much buzz.

This could be a multi-billion dollar opportunity for Netflix. Here’s the math:

  • 120 million TV households in the U.S.
  • 63% of households in the U.S. have one frequent gamer.
  • (120 million households) x (63% gamer rate) = 75.6 million gamer households
  • Netflix is already in 50% of TV households in U.S. with nearly 60 million streaming subs.
  • A similar 50% penetration rate among gamer households implies 37.8 million Netflix Game subs.
  • At $10 per month, Netflix Game could generate $4.5 billion in incremental revenue in the U.S. alone.

Bottom Line on Netflix Video Games

Netflix isn’t jumping head-first into the video game market … yet. But it should. Not in the sense that Netflix should create the Netflix of video games. But rather, in the sense that Netflix should create video games based on its original content, and lock them behind a subscription paywall. Is it a reason to buy NFLX stock? Not yet. But if Netflix gets serious about producing video games in the same way that they got serious about producing original content, then Netflix stock could roar higher.

As of this writing, Luke Lango was long EA stock.

Article printed from InvestorPlace Media, https://investorplace.com/2018/06/why-netflix-inc-should-jump-into-the-video-game-market/.

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