Netflix’s recent advertising partnership with Microsoft has cast a long shadow over this earnings period, with observers wondering whether the gambit can counterbalance the streaming giant’s declining subscriptions and increasing competition.
A look into the company’s gaming ambitions provides some insight into its plans to remain viable in the long term — and how an ads business might be scaled using both gaming and Netflix’s original intellectual properties.
It was only a matter of time until Netflix’s subscriptions began to drop off, and the company’s boardroom has had its eyes on other revenue streams since at least January 2019, when CEO Reed Hastings infamously told shareholders that his company viewed Fortnite as more of a rival than streamers such as HBO or Amazon. The company made its first executive gaming hire in July 2021, recruiting former Facebook Reality Lab vp of content Mike Verdu, and doubled down over the ensuing eight months by poaching 14 gaming executives from companies such as Riot Games, Activision Blizzard and PlayStation.
Netflix’s gaming push is an acknowledgement of the so-called attention economy. Audiences are no longer split between different types of entertainment; instead, modern consumers are constantly searching for new content across platforms and formats. “Any form of entertainment that keeps eyeballs on a screen is competing with others in the same medium,” said Gil Hirsch, CEO of the livestreaming tools and services provider StreamElements, “so streaming services and games are often vying for the same audiences if they are targeting the elusive Gen-Z and millennial demographics.”
Netflix already boasts ample potential advertising inventory in its homegrown intellectual properties; according to some observers, the popular Netflix series “Stranger Things” could generate millions of dollars through product placement. But building up a library of original games could help increase the variety and scale of Netflix’s available ad inventory, particularly as in-game advertising becomes a more fully developed channel.
The streamer has already shown that there is demand for games based on its original properties, developing a free mobile game for “Stranger Things” as early as 2017. It’s also started to experiment with the gamification of other popular IPs such as “Black Mirror” through the 2018 choose-your-own-adventure episode “Black Mirror: Bandersnatch.” There’s room for outside properties, too: the interactive adventure “Minecraft: Story Mode” has been available on the platform since 2018.
Netflix may have to choose between implementing ads into its games and charging users a higher subscription to access them. Gamers are far more willing to accept ads in free-to-play games over premium games, willingly exchanging their eyeballs (and ad impressions) for free gameplay. If Netflix makes its gaming-inclusive subscriptions more expensive than standard subs, it might have a harder time placing ads into its games.
“If, hypothetically, Netflix entered this space and offered a bunch of free games that are not at an additional cost to your subscription, that would be one possible way to implement ads into it,” said Tom Morris, a gaming insights analyst at the consumer research firm GWI. “What we’re talking about here is a trade off. People are probably going to pay more — we can’t necessarily count on that — but paying for a streaming service that offers both viewing content and gaming does open up the idea that you don’t necessarily want to have ads when you are paying for it, so in-game advertising is quite tricky like that.”
Increased ad inventory isn’t the only reason why gaming could play a critical role in Netflix’s future. The streamer has been open about its plans to crack down on shared accounts, recently implementing extra fees for users logged in across multiple households.
For television and movie consumers, password sharing is a no-brainer — there’s practically no downside. But for gamers, an account is more than a way to access streamed content; it represents a unique character that embodies an individual and their virtual identity. Once games are in the mix, password sharing will naturally become a less attractive prospect to Netflix users that have invested time into their characters or avatars.
As gaming and traditional streaming converge, Netflix is arguably falling behind some of its competitors. Amazon has already bridged the gap between game development and streaming, offering both original series and games such as Lost Ark on via Amazon Prime; Google, YouTube and TikTok all have longstanding gaming departments dedicated to livestreaming or game development. Netflix will have to move quickly to make up for lost time.
“The tech companies are watching key demographics spend more time in gaming, either just to hang out or to pursue entertainment, and they’re like, ‘we’ve got to do more here — we need exposure to that trend,’” said Josh Chapman, a managing partner at the gaming-focused venture firm Konvoy.
“I do think that it will certainly help their top line revenue over the coming years, and that will be really well-timed as certain other products they have are sunsetting or becoming irrelevant.”