Netflix and Gaming, Part 2: Can Netflix Compete in Mobile?
Recap
My first substack post asked whether Netflix can disrupt gaming. The conclusion: yes, but to do so it needs to first establish a foothold among poorly served gamers or would-be gamers, particularly in the mobile market. This follow-up post further explores how Netflix could succeed in this first step.
The Gatekeepers
Apple and Google control mobile. If you want mobile games on iOS, you have to download games individually through the App Store. If you want mobile games on Android, you have to download games individually through Google Play. (Facebook also has a gaming app, though it doesn’t appear to have gained much popularity on either iOS or Android. In addition, Roblox streams sub-games within the Roblox universe, though in my view that doesn’t really count.)
Supply Side
The App Store and Google Play environment is brutal for game developers. They compete against thousands of other games with new games coming out each day. On top of that, most games are given away for free. Having a good game is not anywhere near sufficient to achieve success. Getting distribution requires either a lot of luck or tons of marketing dollars. Then, you have to hope that you can get enough high LTV customers to make a decent return, all after paying a 30% tax to Apple or Google.
I don’t have data on this, but I wouldn’t be surprised if over 80% of mobile revenues come from under 20% of gamers. Certainly the ratio is skewed. So, for free-to-play games or any game that depends on in-app purchases and ads, making money presumably depends on both finding and milking these highly profitable customers, which I assume are now a lot harder to find due to increasing tracking restrictions. One can also then presume that the majority of customers, who aren’t profitable, are largely ignored.
In summary: you have a brutally competitive landscape with thousands of competitors, difficult distribution, where achieving a good ROI depends on finding the minority of highly profitable customers, and due to tracking changes these customers are becoming harder to find.
Demand Side
Despite its blistering growth, mobile gaming kind of sucks. The App Store and Google Play are terrible at game discovery. Apple Arcade and Google Play Pass have both failed to gain any meaningful traction. Most games are riddled with relentless advertising or require you to pay money if you want to advance (pay to win). And given the huge amount of free-to-play games, customers are mostly unwilling to pay for a game upfront. The incentive for developers is not to make games that are fun, but to make games with a high LTV/CAC ratio, where, again, LTV depends on finding and milking people willing to spend tens, hundreds, or thousands of dollars trying to beat a game, suffer through endless ads, or both. The incentive for Apple and Google is basically the same: they don’t care about enjoyment; rather all they want is to maximize the amount of spending on both sides of the equation (LTV and CAC), since they can get a cut on either end.
How Netflix Competes - Creative Advantages
Given the challenges and incentives of the current landscape, I think Netflix is set up really well. As Greg Peters described on the last earnings call, on the LTV side, Netflix’s only incentive is to maximize joy -- since the more joy you get, the more likely you are to continue subscribing to Netflix.
We don't have to think about ads. We don't have to think about in-game purchases or other monetization. We don't have to think about per-title purchases. Really, we can do what we've been doing on the movie and series side, which is just hyper laser-focused on delivering the most entertaining game experiences that we can.
In addition, Peters thinks this model is a significant advantage in attracting talent:
So we're finding that many game developers really like that concept and that focus and this idea of being able to put all of their creative energy into just great gameplay and not having to worry about those other considerations that they have typically had to trade off with just making compelling games.
Mobile developers may also be attracted to the idea of putting their game on Netflix due its A+ brand and huge audience -- or, as Eric Seufert put it, the “incredible halo effect from working with one of the most venerated names in consumer tech.”
So, Netflix has significant creative advantages: it has purer incentives to create amazing gameplay and can in theory attract better talent, both of which should result in better games, particularly for customers that are unprofitable in the existing mobile ecosystem
But is that enough? Probably not. Luckily I think Netflix has another advantage, which is arguably even more important: a growing subscriber base of likely over 400 million people and counting, many (or most) of which are likely not big mobile gamers.
Why Netflix’s Subscriber Base Is a Huge Competitive Advantage
For Netflix to succeed in gaming, recall that the first step is to create an offering that appeals to gamers who are poorly served by the existing mobile ecosystem, or people who might be willing to play a game on their phone, but don’t play for whatever reason. These are people who might occasionally play a game on their phone, but play somewhere between not often and not at all. Or people that play somewhat frequently, but are overall let down by the existing ecosystem.
How can a would-be disruptor get these people to play more games? By making it frictionless for them to play. In the existing model, people have to go to the App Store or Google Play and search for games. Then they have to decide which ones to download, and potentially pay for. It’s kind of daunting. And when they do download a game, they’re bombarded with ads or have to pay more in-game to continue advancing. I suspect that this model discourages a lot of would-be gamers.
In contrast, imagine you are a would-be gamer who subscribes to Netflix. You open the mobile app. And the games are just… there. There’s nothing to download, no ads, no in-app purchases. You can just play. There is zero friction. When gaming becomes easy and frictionless, it seems logical that the would-be gamers among Netflix’s members would be a lot more willing to play.
So, Netflix’s subscription model and huge subscriber base make it possible to allow frictionless access to easy, fun mobile games to potentially hundreds of millions of would-be gamers.
In the recent Twitter thread linked to above, Eric Seufert also pointed out that Netflix gives developers “access to a massive audience in an environment that renders mobile games distribution very difficult.” The implication here is that, not only does a Netflix mobile gaming service appeal to developers who are frustrated with the difficulty of reaching customers in the existing download-an-individual-game model, Netflix’s huge subscriber base also could, in theory, allow Netflix to distribute (reach customers) and monetize games better than the existing model. Netflix should then also be able to pay more per title than other publishers, creating a virtuous cycle where success leads to further success. And unlike in TV and movies, Netflix doesn’t (for the time being) have to compete against irrational competitors like Apple and Amazon, who continue to spend billions of dollars on their streaming services despite the highly questionable return on investment.
Are there any other benefits to having a pre-existing base of hundreds of millions of subscribers? Probably. To the extent Netflix wants to get into multiplayer gaming on mobile, there are certainly network effects (the game becomes more fun as more people play) for a subscription service. In addition, Netflix could add a social aspect that would allow people to connect with friends. (However, Facebook has this same advantage to a much larger extent and its mobile gaming efforts haven’t gone that well.)
Summary
To successfully compete in gaming, the first step for Netflix is to create a mobile gaming service that appeals to people who are poorly served by the existing game ecosystem. While the existing mobile gaming ecosystem has seen very strong growth, due to perverse incentives in many ways it sucks for both developers and consumers. Netflix has an opportunity to exploit this suckiness due to four advantages:
Netflix’s only incentive is to maximize joy; ads, in-game purchases, and upfront payments are irrelevant. This should lead to better games, particularly for customers who are poorly served by the existing ecosystem.
Due to the lack of ads and in-game purchases, as well as Netflix’s brand and huge built-in audience, Netflix has an advantage in attracting talent. This should also lead to better games.
Netflix’s subscription model and huge subscriber base make it possible to allow frictionless access to easy, fun mobile games to potentially hundreds of millions of would-be gamers. This is a necessary step for disruption to take hold.
Netflix’s subscription model and huge subscriber base may also allow both developers and Netflix to distribute and monetize games better than the existing ecosystem. Combined with Netflix’s potential advantages in attracting developer talent, this could help create a virtuous cycle, particularly if Netflix is looking to follow the disruptor playbook and go upmarket.
So, at least in theory, a Netflix mobile gaming service could mean both better games and better monetization. And critically, Netflix’s platform provides a means, and potentially only way, for a would-be disruptor to gain a foothold among overlooked customers--the first step in the disruption process. Finally, if Netflix can gain this foothold, monetization and talent-attraction advantages could create a virtuous cycle allowing Netflix to gradually create better and better games, which could eventually appeal to even the most hardcore of gamers.