We all know of Netflix (NASDAQ:NFLX) as a go-to streaming service for TV shows and movies. But what if I told you that the company is looking to venture into video games? At first glance, it sounds like great news for NFLX stock owners. But things aren’t that simple — and the company’s success here is far from guaranteed.
Specifically, news recently broke that Netflix is looking to hire an experienced executive in the video-game industry to help aid its transition. Netflix stock popped about 1% the day after the headlines started to swirl.
Currently, there’s speculation that the company will offer a bundle of games similar to that of Apple’s (NASDAQ:AAPL) Arcade service, although the exact details of its plan are still unknown. So far, analysts are skeptical about the viability of this move.
Now with things cooling down for NFLX stock, let’s consider if the skeptics are right.
NFLX Stock: Netflix Seeks a New Audience
Over the past few years, Netflix has seen great success. It’s arguably the leader of the cord-cutting movement, which has led to the gradual demise of cable television. With that success, Netflix has also seen many strong competitors enter the fray. Now Amazon (NASDAQ:AMZN) and Disney (NYSE:DIS) are two of its greatest challengers in the video-streaming space.
Despite this, though, NFLX has largely remained at the top. That’s because, prior to the rise in competition, it focused much of its efforts on developing strong exclusive content. First, hit TV shows like Stranger Things earned respect from users. Then the company started to produce high-quality hit films like Bird Box.
The Netflix brand now represents quality programing and film. It has plenty of hits under its belt, along with critical acclaim (though it still certainly has plenty of bad stuff, too). But, while the company has succeeded in gaining recognition for quality content, its competitors are now seeing similar success with their own exclusives. For example, Disney’s widely successful show, The Mandalorian, has powered Disney+ and, by extension, DIS stock.
As a consequence, the growth narrative for NFLX stock has started to lose its luster, with video-streaming becoming an increasingly crowded world to do business. Plus, its growth factor is stretching to its limits, thanks to the pandemic. (Netflix experienced accelerated growth during this period, but it’s tapering off.)
All of that is largely what’s bringing Netflix to video games. You should expect Netflix to continue developing quality shows and films, but the possible shift to gaming indicates thirst for an even wider audience: gamers.
The question is, how viable is that opportunity? And is it enough to create a turnaround story for NFLX stock?
Accessing the Gaming Opportunity
If for whatever reason you doubt the opportunity here, consider that, post-pandemic, “videogames are a bigger industry than movies and North American sports combined.”
Here’s a quick look at some other important video-game industry details:
- As of 2020, there’s an estimated 2.8 billion gamers in the world.
- The number of gamers might diminish as we return to normal, but chances are many will retain the hobby, especially with the release of new gaming consoles from Microsoft (NASDAQ:MSFT) and Sony (NYSE:SONY).
- Mobile gaming comprises “58% of the total games market.”
The gaming industry has been growing exponentially over the past decade. Although its growth might not accelerate again like it did during the pandemic, it’s definitely a good spot to be in. There’s clearly a massive audience to tap into here.
But how does Netflix and NFLX stock fit into this space? With all of these exciting factors to support the move, it seems like a no-brainer, right?
Netflix’s Inevitable Role Reversal
The opportunity here for NFLX stock isn’t so straightforward. While the company holds name-brand recognition in the entertainment industry more broadly, the gaming niche is an entirely different animal.
This situation is the inverse of what made Netflix successful with video streaming. Its would-be competitors in gaming are the long-reigning champions of the space, fortified by decades worth of quality video-game franchises and products.
Much like Netflix is a champion in streaming content, companies like Sony, Microsoft and Nintendo (OTCMKTS:NTDOY) have led the general direction of the gaming industry since the mid-1990s. There are also plenty of PC-gaming-focused leaders in the mix, too. For example, Valve Software owns the Steam gaming platform, which is ubiquitous among PC gamers. And don’t forget mega gaming studios like Electronic Arts (NASDAQ:EA) and Activision Blizzard (NASDAQ:ATVI).
Many of these potential competitors have been working on their own streaming services or Netflix-like solutions, backed by exclusive catalogues of insanely popular games. In other words, the “Netflix of Gaming” is not a unique concept. In fact, right now it’s called Xbox Game Pass — a widely successful platform led by Microsoft which leverages the company’s massive library of games to help ensure success. Meanwhile, Sony — MSFT’s long-time adversary — is working on a competitive solution.
Content is a huge driver for these platforms and it’s king in the world of gaming — remember that as we dive deeper into the potential opportunity for NFLX stock.
Put it all together and Netflix probably won’t enter the gaming industry as a legitimate disruptor. At least, not right away. Instead, it’ll likely be a follower. The company will try to leech from the triumphs of others. However, when it comes to the gaming business, history shows that this approach usually isn’t successful.
An Entry Into Gaming Won’t Be Easy
In an interview with Business Insider, analyst Joost van Dreunen put it bluntly: “Big tech sucks at games.” He cites the recent failures of Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), Facebook (NASDAQ:FB) and Amazon to tap into the industry as prime examples.
What’s the main flaw in big tech’s approach, according to Dreunen? “They look at it in a way that distribution goes before the content […] and that’s the wrong way around.”
Most long-time gamers likely understand where Dreunen is coming from here, but maybe with an added nuance. The gaming community’s ferocity is undeniable. While not every gamer fits into the “toxic” category, the community has repeatedly demonstrated an ability to punish companies for “wrongdoings” like no other.
This is largely why it’s hard for companies like Apple and Google to tap into the space, despite their impressive pedigrees in tech. Regardless of how noble or silly the cause, gamers rally against outsiders.
These big-tech companies “dabble” in video games, but that dabbling quickly marks them as outsiders. They don’t “get it.” So, they usually don’t succeed, regardless of how technically impressive their product might seem.
As Dreunen points out, such failures usually come from a lack of attention to content. Taking it a step further, I’d argue that the “outsider” mindset usually means their content won’t resonate with gamers anyway.
Until proven otherwise, Netflix is an outsider to the world of gaming. I think it will stay that way.
The Bottom Line on NFLX Stock
This doesn’t mean there’s no opportunity here for NFLX stock to benefit in the long run. However, the company’s approach to content is undoubtedly the key to its success.
If the rumors are true, then Netflix will offer an arcade suite of games. This seems like a smart move. After all, it can leverage its brand recognition and target a casual audience with such games. As mentioned earlier, most gamers actually play on mobile devices (58%). The games on mobile are usually much less intricate — and much better suited for arcade-like designs. Likewise, it’s possible that NFLX could integrate its gaming suite with its mobile app to better target this group of gamers. (Remember, many of them likely already have a subscription to Netflix).
That all said, if Netflix is gearing toward a hardcore gaming audience, then it seems like a match-up similar to Bambi vs. Godzilla. (Hint: this isn’t a redeeming David-and-Goliath type story). To the hardcore gaming community, NFLX is an outsider bound to be crushed by long-standing titans. Really, the only advantage it has here is if it can exploit the popularity of Netflix Originals and create games based on its series and films. But any gamer will tell you, such games are usually atrocious.
So, for now I’d stick to the sidelines and wait until Netflix gives a clearer outline for its plans before making any big moves based on this news.
Robert Waldo is a web editor for InvestorPlace.com. On the date of publication, he did not hold any position (either directly or indirectly) in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.