3 ways Netflix can make gaming work –and 1 way it can’t

Big tech companies have a track record of failing in gaming, but Netflix’s free-to-play mobile games could be different.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Streaming giant Netflix (NASDAQ: NFLX) recently hired a gaming-industry veteran as part of its plan to add a video game collection to its platform. Shortly after that hire, the company's second-quarter shareholder letter revealed some detail about its strategy for this medium, but there are still questions left unanswered. Analysts and reporters have had a field day sharing their theories on what Netflix games could look like. A senior analyst at Wedbush has already called Netflix's foray into gaming "dead on arrival" in an interview with Yahoo! Finance. More hopeful fans and investors think the company will prove the doubters wrong by innovating where other tech giants have failed in the gaming industry. Realistically, there are only a few paths the company can take based on the information Netflix leadership has provided. Here's the likelihood of each path and what each of them would mean for the company.

Interactive experiences instead of games

There's a case to be made that Netflix's gaming ambitions could look less like traditional video games and more like a whole new genre of "interactive experiences" for its intellectual property. A search of recent job openings at Netflix reveals some fresh insight -- a director-level job opening in the company's new "Interactive initiative" refers to building "game-like experiences" as an opportunity for the role. However, digging further into other postings reveals a totally separate initiative called "Game Studio" (or just "Games"). The separation of "Interactive" and "Games" departments in the company's recruiting language implies two budding departments. Netflix seems to be developing more content like Black Mirror: Bandersnatch, which is a good, low-risk path for the company, but these efforts will likely be separate from its foray into gaming. The company's remarks in its recent shareholder letter and earnings call reinforce this separation with Netflix COO Greg Peters calling ad-free mobile gaming a "primary focus" -- at least initially. In the long term, the company sees all Netflix-compatible devices, including your TV, as "candidates for some kind of game experience."

Sticking to mobile-only gaming

If we look at the history of the IP-based mobile gaming space, we can find a few examples of companies that succeeded in growing out this medium. We can also find examples of failures. Walt Disney comes to mind as an example of both success and failure over the course of its history. While Disney has developed some successful mobile games on its own, the company made a shift around 2016 toward a greater reliance on third-party development for its IP. This shift included the shutdown of multiple in-house projects in favor of seeking partnerships with outside parties. That said, Disney's decision to shut down in-house mobile games was based on their performance, and Netflix's definition of a high-performing game will undoubtedly be different than Disney's. Netflix will have a massive differentiator in free-to-play mobile gaming -- not relying on ads and in-app purchases in a space where virtually all major competitors do. Because Netflix doesn't need to directly monetize its mobile games, it can succeed where Disney failed. For this reason, the streaming company's efforts are likely to be lower risk than what its peers attempted.

Licensing content from third parties

In Netflix's second-quarter earnings call, COO Greg Peters claimed Netflix will also license games as part of its offerings. This brief comment has been overlooked in most discussions about the news so far, but it could have big implications for its success. In addition to developing mobile games in-house, Netflix may license existing mobile games to build an attractive lineup before investing heavily in first-party content. If that strategy sounds familiar, it's because that's exactly how the company succeeded in streaming movies and TV series. Such a move would bolster the company's initial video game offering, familiarize subscribers with its gaming platform, and offer lessons to support the roll-out of in-house titles.

Avoid console and PC games

The Netflix-compatible devices that the company sees as candidates for its gaming platform include consoles, smart TVs, and PCs. However, it's no secret in the gaming industry that major tech companies fail often in their pursuit of the console and PC gaming markets. For example, recall Amazon Game Studios' inability to create a single hit game despite flashy industry hires. And don't forget Alphabet, which hired hundreds of developers to support the growth of its Google Stadia gaming platform only to shut down in-house development soon after. While these failures don't necessarily doom Netflix, they don't paint a picture of a promising opportunity in console and PC gaming. Netflix is more suited to develop less complex, lower-budget mobile games that can differentiate themselves from the competition.

Now what

Netflix subscribers could be playing games on the platform as soon as next year, according to Bloomberg. That aggressive timeline makes sense assuming the first games to roll out will be licensed or in-house mobile games. Overall, this risky bet on gaming could pay off, and it makes sense as the streaming giant's next step to take advantage of its valuable IP and massive subscriber base. As long as Netflix sticks to the three viable strategies outlined above -- interactive experiences, mobile gaming, and third-party licensing -- investors should be optimistic about this next chapter of the company's growth story.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Taylor Weldon has no position in any of the stocks mentioned. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and has recommended Alphabet (A shares), Alphabet (C shares), Amazon, Netflix, and Walt Disney. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. The Motley Fool Australia has recommended Alphabet (A shares), Alphabet (C shares), Amazon, Netflix, and Walt Disney. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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