Netflix Inc. publicly confirmed its expansion into gaming in its second-quarter earnings release materials, and executives on a July 20 earnings call said the strategy is both incremental to its existing content initiatives and a potential source of high investment and multilateral partnerships in the future.
The company will begin its foray into games focusing on mobile and existing intellectual property, Chief Product Officer Greg Peters said on the call. From there, all avenues are open, from gaming platform expansion to multiple device interactivity and third-party licensing.
"We're going to keep innovating in that space. We believe there is a rich opportunity to continue to deliver and advance the technical capability and improve the quality of game experiences," Peters said. "Maybe someday we'll see a game that spawns a film or a series. That would be an amazing place to get to."
Though the company is in the early stages of its gaming initiative, Peters believes there is a "big, big prize here."
The company is viewing games not as a stand-alone service with its own monetization value, but as incremental to its existing content product platform, executives said. The value of gaming will be its support to the existing subscription platform, customer satisfaction, retention and engagement. In that way, the strategy will be similar to Netflix's forays into other genres of entertainment like unscripted series and feature films, Peters said.
Given that the company will be providing the gaming service via its subscription platform, it can provide developers creative freedom free from advertising and in-app purchases, he said.
However, the company will maintain an open approach to learn the business and iterate on success.
"This is going to be a multiyear effort. We're going to start relatively small. We'll learn, we'll grow, and we'll refocus our investment based on what we think is working," Peters said.
Some analysts are yet to be fully convinced of the gaming opportunity for Netflix.
MoffettNathanson analyst Michael Nathanson, for example, was dubious of the gaming strategy. In a recent note on Netflix's "second act" and whether it can successfully pivot into other product categories like games and merchandising, similar to how The Walt Disney Co. has diversified, the analyst said he believes the company would be better suited adding an advertising-based tier to its platform and sports content.
"To us, it seems like Netflix is taking a page out of the Disney playbook, and trying to create a flywheel model where it can monetize intellectual property across various business segments," Nathanson said in the June 29 note. "Although gaming represents an opportunity for Netflix, we do not anticipate it will become a meaningful business if Netflix pursues a similar strategy of primarily licensing intellectual property to game developers."
Chief Content Officer Ted Sarandos reiterated the company's hesitation to add live sports content to the platform.
"I'm not saying we'll never say never on sports, but what is the best use of about $10 billion, and I think that's what it is going to cost to invest meaningfully in big league sports," Sarandos said. "Our fundamental product is on demand and advertising free, and sports tends to be live and packed with advertising."
Truist Securities analyst Matthew Thornton was more bullish on the potential impact of Netflix's move to add gaming, but with plenty of caveat. The company could keep its gaming product in-house and use its owned intellectual property. While a clean and relatively easy product strategy, this approach would require some success in a very unpredictable market, and even then would only be marginally accretive, Thornton said.
"Where it would get very interesting is if [Netflix] were to bring third-party content to the platform," Thornton said. "This could start to close the content gap and make [Netflix] more competitive with aspiring streaming gaming platforms."
However, this more "interesting" strategy would require more complexity, more investment and higher risk potential, Thornton said.
For its second-quarter results, the company managed to beat membership guidance and expectations in the second quarter and launched a modest initiation of its share repurchase program. But its EPS landed below Wall Street's forecasts and growth expectations remain muted.
The company reported paid net new members of 1.5 million, compared to prior guidance of 1.0 million. For the third quarter, Netflix expects 3.5 million paid net additions.
The new members bring Netflix's total subscriber base to 209.2 million, up from 193.0 million in the prior-year second quarter.
On financials, the company reported net income of $1.35 billion, or $2.97 per share, compared with $720 million, or $1.59 per share, in the year-ago quarter.
The S&P Global Market Intelligence consensus EPS estimate for the second quarter was $3.16 on a GAAP basis and $3.15 on a normalized basis.
The company said its expanding profits are allowing it return capital to shareholders while growing its operating business. Netflix bought back 1 million shares for $500 million during the second quarter.
Total revenue for the quarter was $7.34 billion, up from $6.15 billion a year prior. The company expects third-quarter revenue to clock in at $7.48 billion.
Netflix shares were down about 2.5% in after-hours trading July 20.
