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Netflix shook up the future of streaming bundles on Tuesday with its announcement that the "Grand Theft Auto: The Trilogy – The Definitive Edition" will be released on Netflix’s mobile app on December 14. The hit games from Rockstar Games—"Grand Theft Auto III", "Grand Theft Auto: Vice City", and "Grand Theft Auto: San Andreas"—have been ”updated for mobile” and will be added to the existing portfolio of 80 mobile games on Netflix without ads, in-app purchases, or extra fees.
We could describe this as a bundle of hit shows, movies and games accessible for a single monthly fee. That mirrors the logic of the bundling business model of cable networks, which aggregates multiple television channels and charges consumers a lump fee for a bundle of channels.
We could also describe this deal as Netflix subsidizing the free distribution of Rockstar Games and 80 other mobile games to a subset of its subscriber base (mobile gamers). That would mirror the business model of regional sports networks (RSNs) and cable TV channels like AMC Networks that were launched and distributed by cable networks. Those channels were either included for free or for a minimal fee (NOTE: I wrote about both models in “Subsidies In a Streaming World” back in March).
Bundling is a hot topic, especially after Disney’s recent carriage deal with Charter in September. The fun question is whether Netflix is pursuing a bundle, a subsidy or both. Because whatever it is doing is redefining the bundle while Charter and Disney stick to the tried and true of the linear model.
Key Takeaway
Both Disney-Charter's new bundling “precedent” in streaming and Netflix's new gaming bundles progressively evolve the cable bundle model, but in different directions. Both approaches imply an inevitable death sentence for legacy media streaming apps with or without a bundle.
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It’s Obviously A Bundle, But…
The obvious answer is that Netflix is pursuing a bundle: Netflix subscribers get access to movies, TV shows and games for a lump sum every month. But, we do not know if it operates like a cable bundle in terms of its partnerships with gaming studios. It operates much like early cable distributors like Cablevision launched channels and produced their own content. It owns some gaming studios—it purchased studio Boss Fight Entertainment last March—and produces its own games (“Stranger Things”) Netflix also licenses third-party IP like “Grand Theft Auto” and “Teenage Mutant Ninja Turtles: Shredder’s Revenge” from Paramount Global (which I wrote about in March).
The license terms are unlikely to be fixed monthly fees like the affiliate model: CNBC reported in October that games have been downloaded 23.3 million times and averaged 1.7 million daily users, less than 1% of total subscribers and 2.5% of U.S. subscribers. Instead, the business terms are more likely to be subsidies. In this model, Netflix pays a license fee to the studio that values the content for how it contributes to the Netflix ecosystem, either in customer lifetime value or perhaps even usage. Because Netflix neither monetizes with ads, in-app purchases, or extra fees, it is tying the success of games to the subscription fee and streaming advertising revenues, only. The benefit is probably churn reduction more than growth.
The bundle as Netflix has designed it aims far beyond the mobile phone and towards the broader gaming industry. Market researcher Newzoo says people younger than 13—Generation Alpha—spend 22% of their entertainment time playing games, more time than they spend streaming movies and shows (17%) or watching television (16%). Generation Z—people ages 13 to 27—and Millennials, who are roughly ages 27 to 42, spend as much time gaming as they do streaming. Games have not been a growth driver but Netflix seems to believe they will be. Back in March Co-CEO Greg Peters described the gaming initiative as “planting some seeds…that if we execute well and we're excited about the progress we're seeing so far, will represent the future potential for us in terms of and more profit opportunities.”
They would expand gaming offerings on Netflix to be played only on a television or PC with a major-publisher-type console game in the works and recently announced plans for cloud gaming.
Subsidies In A Streaming World, Revisited
Liberty Media Chairman John Malone recently argued on CNBC that streaming services and cable bundles “are kind of tied to the hip”, and therefore any streaming bundle needs to reflect that. Legacy media streaming services need the bundle because they are both unable to scale and survive on their own and because their value proposition, as is, is unfair to the consumer.
He offered the example of consumers faced with the choice of subscribing to ESPN+ or continuing to receive it as part of a bundle. The first option forces consumers to pay for ESPN twice (cable and streaming). The second option reflects Charter and Disney’s agreement to subsidize access to ESPN+ (and then later the ESPN DTC service) to subscribers in the Spectrum TV Select Plus tier at no additional fee.
This argument reflects something I argued in “Subsidies In a Streaming World” back in March:
“[A]s in 1979 and 1984, the AMC Networks model and the RSN models will need subsidies to survive in a world of 37 million cable households. But in 2023, it increasingly seems that subsidies seem more like charity. In the best case subsidies offer some form of interim financing (e.g., a bridge loan) to stay afloat with the expectation that a new model will be found.”
According to Malone, the Disney-Charter deal is interim financing for Disney and other legacy media companies so they “will transition slowly to the future” instead of navigating “an abrupt break” between cable and streaming. The Charter-Disney deal pays a wholesale fee to Disney for subscribers who sign up for Disney+ and ESPN+. By including both services in the cable bundle for free, Charter makes it easier for Disney to monetize 9.5 million Spectrum Select consumers while making it harder for them to churn out of those apps.
So, What’s The New Precedent?
The question now is whether the Charter-Disney deal is a one-off or precedent. Most carriage deals have been renewed in recent years, only Warner Bros. Discovery faces renegotiations in 2025. That will impact 20+ channels, some of which may not survive after Disney was forced to remove some channels like Freeform and the National Geographic channel. Otherwise, we are unlikely to see carriage disputes in 2024 unless cord-cutting accelerates in ways that challenge the economics of the model.
Whatever plays out, Netflix is setting a new precedent of progressively iterating a cable bundle-type model towards gaming. The survival of Rockstar Games or any gaming studio partner does not depend on Netflix, but it can benefit from marketing for the widely anticipated release of “Grand Theft Auto 6” scheduled for 2024 (and a trailer was just announced for December). This deal will help generate global awareness for the release across 247 million Netflix subscribers and also drive sign-ups of “Grand Theft Auto” fans for Netflix subscriptions. Netflix offers gaming on all tiers, so it will benefit from both acquiring high-value Gen Z and Gen Alpha gamers for advertisers and monthly subscription revenues.
By the end of 2024, Netflix’s bundle will help to drive the adoption of Netflix for both streaming and gaming, whereas Charter’s Spectrum cable bundles will help to reduce both churn from cord-cutting and churn of a subset of Disney+ and ESPN+ subscribers (Disney has 46.5 million subscribers in the U.S., alone). Both present the question of what the best bundling strategy will be in 2024.
Eight-one percent of streaming media executives believe streaming bundling is the future, according to study from Bango, a platform for subscription bundling of streaming services. But, 64% believe there will be technical problems, while 63% are concerned about “complexity of contract negotiations” and 52% worry about time-consuming onboarding procedures.
The Netflix deal solves for all of these problems by ruling out legacy media streaming apps as a partner. The Disney-Charter deal solves all these problems by relying on cable networks to offer interim financing to help those apps survive. Both answers imply an inevitable death sentence for legacy media streaming apps with or without a bundle. In the case of Netflix's gaming bundle, those apps seem to have no value. Despite all the chatter of bundling's an inevitable future for 2024, it no longer seems to be a solution for legacy media's streaming woes.