Friday Mailing: Was Netflix's Gaming Strategy Revealed In Its Boss Fight Entertainment Press Release?
Yesterday Netflix announced it was acquiring a third independent gaming developer, Boss Fight Entertainment. But I thought the quote from Boss Fight was more notable:
“Boss Fight’s mission is to bring simple, beautiful, and fun game experiences to our players wherever they want to play,” said the founders of Boss Fight Entertainment. “Netflix’s commitment to offer ad-free games as part of members’ subscriptions enables game developers like us to focus on creating delightful game play without worrying about monetization. We couldn’t be more excited to join Netflix at this early stage as we continue doing what we love to do while helping to shape the future of games on Netflix together.”
The "creating delightful game play without worrying about monetization" jumped out at me, as it has "hints of NFLX leading a completely out-of-the-box attack on the App Store model (which it already circumvents)".
But what would that mean in practice?
Netflix's "Ad Network"
Mobile Dev Memo's Eric Seufert hit on the significance of Netflix's move into gaming in last week's Netflix already operates an ad network. Next stop: Content Fortress:
Instead of selling its personalization machinery and placements to advertisers, Netflix should offer them to content creators as a means of distribution through a publishing business. In other words, Netflix should become a Content Fortress. Netflix could use its smartphone app to distribute games and other types of content, powered by its personalization engine. And these third-party developed apps, while still published under the Netflix label, should be freemium and not gated by the Netflix paywall. As these products grow, so does Netflix’s data set of non-video streaming engagement data, allowing it to drive cross-promotion between published apps in a sort of first-party audience network. And these apps could also cross-promote users back to Netflix, potentially allowing the company to attenuate its subscriber growth slowdown.
This quote adds a ton of color to "without worrying about monetization": Netflix can be a content distribution mechanism for creators who otherwise find it cost-prohibitive to distribute through the Apple App store themselves.
That is a very different vision of Netflix's future than the Disney-like objectives I had perceived in Netflix, Wonka, Gaming, Facebook & Kids:
I think both the Dahl library and Night School Studio acquisitions are iterative steps towards Netflix “becoming” Disney, with the Dahl library being obvious and Night School Studio being the less obvious step.
Netflix’s bet on Night School Studio, and on offering in-app gaming more generally, is the opposite of what Disney has done in gaming (it closed its in-house studio in 2016 and pivoted to a licensing model). That is interesting on its own.
What makes it more interesting is that bringing gaming in-house is an un-Disney-like move to become more like Disney, and at a time when Disney’s streaming business has become a global competitor for kids and family content.
Meaning, Netflix's early moves in gaming - which repeat the phrase in each press release "no ads and no in-app purchases" - all suggest that Netflix may be taking steps towards becoming an Apple App Store and Google Play competitor in mobile gaming. Disney may be a competitor, but the objective is no longer a Disney PARQOR Hypothesis-type ecosystem.
How would Netflix compete in mobile gaming?
With "no ads and no in-app purchases" what would Netflix's gaming business model look like?
Simply, I think: it would be the same subscription-based model.
Netflix CFO Spencer Neumann told Morgan Stanley Technology, Media & Telecom Conference earlier this month that Netflix's objectives are "growing revenues, growing profits, growing cash flow and that's not just driving membership but driving engagement".
It sounds like games without ads and without in-app purchases accomplish all of those objectives. In the short term, it seems like these studios are going to develop games that can become new outlets for existing Netflix IP.
But the logical question is, if these games succeed in driving Netflix's business objectives, why would Netflix need to be limited to games for IP Netflix owns?
Netflix already distributes third-party movies and TV series. Why couldn't it distribute games? The short answer is, it could distribute any games.
Neumann described 2022 as a "learning year" at the Morgan Stanley Conference, but added:
"This is something I hope is a big part of our business in a decade," he said. "It is not going to be a big part of our business in the next 12 months.... The first year was really about getting the plumbing right... Now we're leaning into learning which games our members enjoy".
So, I am no longer sold on my description of Netflix's gaming strategy as "bringing gaming in-house is an un-Disney-like move to become more like Disney" from Netflix, Wonka, Gaming, Facebook & Kids.
Rather, I think Netflix has its eye on Apple's estimated $45B in gaming revenues from 2020, and its estimated $8.5 billion in operating profits from games that same year. As a company needing revenue growth and a story of free cash flow, Netflix could peel off business from both Apple and Google stores and offer mobile gaming developers better economics within the Netflix ecosystem than from trying to build out games that monetize both users with in-app purchases and ads, while giving up 30% of revenues.
Helping Gaming Studios Circumvent the 30%
One last thought: maybe Netflix is not seeking to peel off any business from Apple or Google. Rather, it sees a business opportunity in aiding developers who also seek to create "delightful game play" but are objectively penalized by the economics of the 30% revenue share for in-app transactions or by the need to include ads.
The Epic v Apple suit was about Apple's "often ambiguous, subjective and irrational" approval process for games.
Developers complain that titles waiting for App Store review sometimes take weeks to be cleared. One local games studio said it gave up hosting seasonal in-game events, which can be a big revenue accelerator, because Apple didn’t respond to their update review request for more than a month.
Initial signals from Netflix suggest a simpler approval process - likely because the initial round of games will be proprietary and developed in-house. But, more importantly, there is no 30% fee.
Epic CEO Tim Sweeney argued in Epic v Apple that the 30% fee is effectively a disincentive, if not an obstacle, to building a “metaverse” business around Epic Games' massively successful Fortnite franchise.
We have zero evidence whether Netflix's new investments in gaming studios have a long-term eye to Epic Games as a partner. Odds are, they do not - Fortnite's in-app transactions must share 30% of revenues with Apple (and Google in Google Play), and that would still be true if Netflix distributed an Epic Games metaverse app within the Netflix app.
But, there are many unhappy developers out there whose sentiments are best reflected by the phrase "delightful game play without worrying about monetization".
Back of napkin math suggests that in a $45B marketplace, there are many win-win outcomes to be had in mobile gaming if Netflix can build an end-around to the Apple App Store and Google Play for smaller studios with a similar pain point. Those developers need better distribution business models and Netflix requires content that can drive both more engagement and higher subscription models while reducing churn.
The bigger picture for Netflix's gaming strategy is becoming clearer, and it's looking less and less like Disney.
You can also read two past and two recent mailings on this topic, below:
A Short Essay on “Aggregator Bundling 2.0” & Convergence After Epic v. Apple (September 2021, in Substack archive)
Netflix, Wonka, Gaming, Facebook & Kids (October 2021, in Substack archive)
WarnerMedia & Netflix's Narrow but Fascinating Challenges in AVOD & Gaming (March 2022)
Mark My Words, We Must Imagine Other Business Models for Netflix Than Advertising (March 2022)