Is Netflix wasting hundreds of millions on games?

Whether netflix (NFLX 2.02%) invested $200 million in a TV series or movie and less than 10% of its global subscriber base decided to check it out, management might consider that a disappointment. Well, Netflix is ​​investing heavily in games with little to show for it so far.

Its 24 titles have generated 23.3 million total downloads since last November, and around 1.7 million Netflix subscribers play one of its games every day, according to data from Apptopia. That’s a tiny percentage of Netflix’s 220 million subscribers.

Management is betting on gaming as it has seen its subscriber base shrink over the past two quarters amid economic uncertainty and increased competition. But that hasn’t turned out to be a great gamble so far.

Gambling is not the same as movies or TV

Netflix has a built-in advantage when it comes to making a popular TV series or movie. It already captures the attention of 220 million homes worldwide, making it one of the most effective digital billboards in the world. Netflix’s user interface promotes discovery and can recommend titles that are seeing traction or that it thinks you’ll like.

If it’s spending $200 million on a movie, it doesn’t need to spend as much on marketing as other media companies (although spending more on marketing than it currently does might be worth it).

When it comes to games, however, the process isn’t quite as smooth. There are two challenges for Netflix, both relating to friction in driving users to games.

First, Netflix probably won’t promote games well to viewers on connected TVs or PCs. Few people will see a game on their TV and then download it to their phone. Thus, Netflix only promotes games on smartphones.

The problem is that only a tiny percentage of viewing takes place on smartphones and tablets. It was 15% in 2018, but that number may have fallen further as connected TV devices have become increasingly popular.

Second, Netflix needs to direct iOS users to the App Store in order to download its games. While Android users can directly download games from the Netflix app, a large percentage of the world uses iOS.

With that in mind, the fact that around 10% of subscribers have even downloaded a Netflix game shows that it’s doing quite well in penetrating users streaming on mobile. But with far more friction driving game downloads than releasing a new movie, there’s still a significant challenge for Netflix to overcome.

Is it worth it?

The question for investors is whether games are worth it for Netflix. With the increased difficulty of making a game popular (or maybe I should say making a game popular), should Netflix just stick to what it does best?

It has already purchased three independent game studios, including the acquisition of Next Games for $72 million. And it plans to expand its roster from 24 games to 50 games by the end of the year.

The total investment is likely comparable to that of the media company’s biggest film and TV productions. But as a percentage of its total content spend, it’s still a very, very small portion. The company spent $17 billion in cash on content in 2021, and it’s likely to stay around that level in 2022.

The way I see Netflix’s foray into games is like a moonshot. The biggest mobile games seem to come out of nowhere and go viral (think wordle). The same thing happens with some of Netflix’s biggest shows (think squid game). The more photos the company takes, the more likely it is to find success. And he has the resources and the experience to capitalize if and when he finds that shot. This could result in higher subscriber retention and monetization later.

So while the games have been disappointing so far, there’s no need for Netflix to drop them anytime soon.

Adam Levy holds positions at Netflix. The Motley Fool has posts and recommends Netflix. The Motley Fool has a disclosure policy.

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