Netflix – The ecosystem game pt. II

Games are about loyalty for now.

• Netflix has launched a suite of exclusive games for mobile devices that will be soon made available to Android users but the service will need to be just as easy and fun to use on iOS devices if Netflix wants the service to be successful in growing user loyalty.
• The launch follows a signalling of the intention by Netflix at the E3 games conference as well as the hiring of a key executive from Oculus a few months ago.
• Some of the games are spin-offs from its in-house TV series which makes sense, but others have been created solely on the basis of being fun to play.
• Typically, a developer will always launch iOS first because this is where most of the money is made but when Android is launched first it is a clear signal that the developer’s proposition falls foul of Apple’s rules.
• In this case, it is the rule that prevents apps from hosting other apps as to Apple this looks like a competitor to the Apple App Store.
• However, it looks as though an iOS launch will go ahead fairly shortly which is probably due to Apple’s grudging relaxation of some of its rules in the face of growing antitrust and legal pressure.
• This is essential if Netflix wants its games to have any impact as almost all of its users engage at least some of the time through a mobile device and in its biggest market, half or more of its users are on iOS.
• There are no immediate plans to monetise these games directly, which means that at the moment, this is about driving engagement and loyalty.
• This will help as Netflix is likely to be forced to increase prices both as a result of the high level of inflation hitting production costs and to continue investing in content.
• If games are successful, there is also the opportunity for monetisation of gaming further down the road, but this would be a new avenue for Netflix as I suspect that the only effective way to monetise casual games other than selling games directly, is through advertising.
• This move also highlights the possibility for Netflix to move into other areas and entice users to spend more of their time engaged with its services.
• This has proven to be pretty tricky to pull off in practice but there are some examples where it has been successful.
• Either way, there is unlikely to be any financial impact in the medium term, and Netflix’s valuation which at 61.3x 2021 PER remains too high in my opinion.
• Hence Netflix remains in the category where good news gives a small rally, but a slip-up is punished with a large correction.
• I am happy to stay away.