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The Medium delivers in-depth analyses of the media marketplace’s transformation as creators, tech companies and 10 million emerging advertisers revolutionize the business models for “premium content”.
Last week, Netflix revealed four new interactive fiction mobile games based on its top reality TV franchises: “Netflix Stories: Perfect Match,” “Too Hot to Handle 3,” “The Ultimatum: Choices,” and “Netflix Stories: Selling Sunset.” All will be released later this year.
Any Netflix member wanting to play may find these games on the Netflix mobile app, download a game app from the App Store or Google Play, and then log in with their Netflix account. Members experience minimal friction across both ad-supported and ad-free tiers: No new account creation necessary, no additional charges to play the games, no ads (for now) and no in-app purchases.
The relationships Netflix consumers have with Netflix IP are fundamentally different from their relationships with other “big IP”. For example, Amazon’s hit show “Fallout” is based on a popular video game. Now, the games are popular again, appearing on bestseller lists and at the top of Steam player charts. But, anyone watching “Fallout” must leave the Prime Video app to play the game and create an account on a paywalled third-party app. The same is true for fans of Disney’s Marvel or Star Wars who consume shows and/or movies on Disney+ and then need to purchase console games (and perhaps a console) to play in those universes.
This all reflects how Netflix has built a solution to the argument I made in “Back To The Future Of Pre-Paramount Decrees Studio Distribution”: With the increasingly expensive and convoluted economics of "big IP", consumers need the owners of IP to help stretch the dollar of their spend.
Netflix is delivering that while its competitors are not, and is doing so in a way that both extends and threatens the value of “big IP”.
Key Takeaway
Netflix may still license “big IP” like “The Super Mario Bros. Movie”, but it will always be focused on maximizing the value of its IP to its members, first. The more Netflix continues to grow and evolve, the less valuable Hollywood's “big IP” will be within the Netflix ecosystem for paying Netflix members.
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A Tough Marketplace
Because its games are free, Netflix’s gaming business seems insulated from the real-world market forces that play out on other platforms. As Leanne Loombe—Netflix’s vice president of external games—recently told Variety:
“Interactive fiction games in the free-to-play mobile space, they’re super popular, but they also have barriers within them when you’re playing. In order to get the best story, in order to get the best items, the customization, you generally have to pay.”
For this reason, Netflix’s aggressive gaming push contrasts starkly with the current gaming marketplace: 10,000 jobs were lost in 2023, and an additional 10,100 jobs lost in 2024, to date. Driving those losses and a broader market reset are several market headwinds that emerged after the pandemic drove a surge in video game demand. Management at companies like Microsoft, Riot Games, and Embracer Group assumed this growth was locked in, creating a permanently bigger market. Instead, it was more like a one-time windfall, and demand has since dropped for games post-pandemic.
Long-term growth models have become unsustainable. Microsoft went so far as cutting jobs at studios currently developing games for Xbox.
Netflix operates on a smaller scale. According to data from Sensor Tower, games released by Netflix were downloaded 81.2 million times from Apple's App Store and Google Play in 2023. Across 100 games, on average that is less than 1 million downloads per game per year. Whereas Xbox and PlayStation each have around 120 million monthly active users.
53% of Netflix’s total downloads came in the fourth quarter alone, likely due to the release of the Grand Theft Auto trilogy in November. Digital intelligence and analytics firm Sensor Tower reported “GTA: San Andreas” is already Netflix's most downloaded game of all time with nearly 10 million downloads since its December 2023 launch. That is only 10% less than the 11 million downloads Sensor Tower reported for Activision Blizzard’s “Call of Duty: Mobile” for all of 2023.
Perhaps the biggest difference is that the economics of Netflix’s gaming business focus more on reducing churn than on generating revenue. Users will sign up to play games like “Grand Theft Auto”, but the real advantage is super-serving fans of its popular shows who are “naturally incentivized” to seek out related content. Netflix makes members happy by reducing the friction in both discovering and playing those games.
The ARPU of Storytelling
In last May’s “The ARPU of Storytelling”, I highlighted how Warner Bros. Discovery and Disney—under former CEO Bob Chapek—have had trouble selling investors with ambitious visions of average revenue per user (ARPU) expanding beyond streaming subscription revenues. There are multiple problems with their pitch. They either do not have sufficient scale in streaming, profitable business models or compelling visions for how gaming will integrate operationally and strategically. Chapek’s vision was directionally correct but too complex for investors to grasp.
Warner Bros. Discovery management attempted in its Q3 2023 earnings call to sketch a future for Warner Bros. Discovery “in which growth and profitability from gaming and streaming provide a cushion for the decline of the company’s linear networks”. The pitch fell flat and invited tough questions from Bank of America analyst Jessica Reif Ehrlich that implied Warner Bros. Discovery’s management team is on a learning curve with its gaming business (NOTE: I wrote about this last December in “Media Executives Covet Games, but Are Ill-Suited to Run Them). Warner Bros. Discovery has since reported that it lost $200 million on its recent release of the third-person action shooter console game “Suicide Squad: Kill The Justice League”.
Through the lens of “big IP”, there are strategic, operational and financial disconnects across both the Warner Bros. Discovery and Disney ecosystems. No single revenue or ARPU story may be built across those ecosystems because the consumer has multiple relationships with the media conglomerate. Whereas, the Netflix member has one, seamless user experience across games, shows and movies that “channel the enthusiasm of a show’s community right back into the app”. Netflix’s Leanne Loombe described this experience to The Verge as a seamless “connective tissue between the TV show and the game.”
Extend & Threaten
That seamless “connective tissue” puts Netflix in a position to both extend and threaten the value of “big IP”. It has proved with “big IP” like Paramount’s “Teenage Mutant Ninja Turtles: Shredder’s Revenge” and Rockstar Games’ “Grand Theft Auto” that it can make popular games accessible on mobile for the first time and to 270 million members worldwide. That extends the value of “big IP” in both movies and TV (Teenage Mutant Ninja Turtles) and games (GTA).
This was evident in the most recent “What We Watched” report, where Paramount's “Teenage Mutant Ninja Turtles” movies performed well. “Teenage Mutant Ninja Turtles 2” and “Rise of the Teenage Mutant Ninja Turtles: The Movie” were in the top 10% of most viewed content on Netflix for the second half of 2023.
But, Netflix can threaten the value of “big IP” because it also invests in its proprietary IP, and all available data shows Netflix's IP tends to perform best with its members. That is feature of the Netflix ecosystemand not a bug. As I discussed in last Thursday’s essay, local IP like “Squid Game” or "Money Heist" that travels internationally are also cost-efficient. Netflix pays first-party producers fixed fees and not the variable licensing fees it pays third-parties. Reality TV has cheaper talent and production costs than Hollywood TV or movie productions.
So, Netflix is financially incentivized to promote something like the reality show “Too Hot To Handle”—which has nine different seasons across the U.S., Latin America and Germany—because it monetizes it as a show, primarily, and as a game, second. Effectively, Netflix is always going to be incentivized to monetize its IP over “big IP”.
Netflix may still license “big IP” like “The Super Mario Bros. Movie”, “Teenage Mutant Ninja Turtles” or “Spongebob Squarepants” (another Paramount title), but it will always be focused on maximizing the value of its IP to its members, first. Loombe told Variety “our vision for Netflix games is to have a game playable on Netflix for every one of our members." If past is precedent, its best bets will be with Netflix IP.
The more Netflix continues to grow and evolve, the less valuable Hollywood's “big IP” will be within the Netflix ecosystem for paying Netflix members.