Netflix will launch a free gaming service in 2022, built into its video streaming platform. Gaming is a natural expansion for a company that has developed interactive content in the recent past. The announcement comes less than three years after Netflix’s co-CEO Reed Hastings referred to Fortnite as a bigger competitor than HBO. However, Netflix faces an uphill battle to succeed in the highly competitive gaming market and must invest wisely to overcome technological and competitive barriers in the short run.

Why is Netflix moving into gaming?

Netflix’s move into the gaming industry is driven by three factors, including:

  • Market size. Gaming is a large market that is growing rapidly. According to GlobalData forecasts, the global video games industry was worth $173bn in 2020, up from $149bn in 2019.
  • Customer loyalty. Massively popular games such as League of Legends and Call of Duty have been around for over a decade and continue to attract millions of gamers. Theme upgrades and new labels keep these games alive for years after their release.
  • Expansion opportunities. Netflix has experimented with interactive movies in the past and has received positive responses for shows like Carmen Sandiego and Black Mirror: Bandersnatch. Therefore, gaming is a natural expansion for Netflix.

Heavy investments are needed to overcome technology and market risks

Netflix plans to start by focusing on mobile games but has yet to elaborate on its distribution strategy. Essentially there are two possible models: cloud gaming (like Google’s Stadia service) or on-device downloading (like the Apple Arcade). Give that the Netflix service is built on cloud-based streaming technology, cloud gaming looks the most likely option. However, it will need to make substantial investments to win in the gaming market, whichever route it takes.

Netflix, reportedly, does not currently have cloud-based game streaming capabilities. Streaming games via the cloud is a more complex process than streaming one-directional video content due to the constant interaction of users with the game. Although Netflix could partner with or acquire a game streaming provider to tackle this, it will also need to address the latency issues associated with cloud gaming. Investments in cloud, 5G, and AI will be a critical factor for success in the cloud gaming market, contested by Microsoft, Nvidia, Sony, Amazon, Facebook, Google, and many others.

The downloading approach is relatively easier to implement, but competition is significantly more intense than cloud gaming. It is unlikely that all Netflix’s existing subscribers will use the service, so attracting gamers will be of vital importance for early success. However, hardcore gamers are likely to be sceptical of the service due to Netflix’s inexperience in gaming, while some will wait to see the catalogue of titles on offer before subscribing.

Exclusivity will ensure long-term success

It is expected that games built around Netflix’s original shows and movies will drive users to the service in the early days, but the service will need at least one killer title to retain users. It must, therefore, focus on exclusive games across a variety of genres and add popular third-party titles like Call of Duty and Among Us. It must also explore adding esports and branded content to grow users and revenues in the long term.