In Focus: Netflix Gets Stickier
Updated: Aug 1
Ecosystem. We've heard the word a lot, almost to the point where we're tired of hearing it. For investors though, it's a word that can pay off big when the ecosystem is put together correctly.
For a quick tutorial on ecosystems and the value of ecosystems, check out this MKBHD video.
What ecosystems do best is make a company's offerings sticky. Several years ago Apple decided to start investing in its services business. A move that initially upset the masses on Wall Street who saw Apple as the iPhone company, and wanted Apple to just make better iPhones and sell more iPhones.
Apple understood that there is very little that separates a high end iPhone from a high end Android phone, but what could keep iPhone users coming back to buy more iPhones is the iOS ecosystem. Making an iPhone work seamlessly with Apple Music, Apple TV+, a MacBook Pro, and an iPad, made Apple and its products sticky.
So what does a company like Netflix do when its growth is starting to slow down? It attempts to make the service sticky. With growth slowing, keeping existing customers is as important as gaining new customers. For this reason, Netflix has decided to add gaming to its platform.
I've long stated that Netflix needed something else that would enhance the customer's experience and be of value to the customer. In 2019 I laid out my thoughts on why Netflix should buy Tidal and add music streaming to its video streaming.
Like anything else in life, Netflix gaming can be a massive success or a huge failure. To fail, Netflix just has to follow Google's Stadia plans. Go all in, go big right out of the gate, and try to go head-to-head with the biggest and best in gaming. But to succeed, just do the opposite. Start small, see what works, update often, and change things that aren't working quickly.
I've learned an important lesson from Amazon Prime Video and Apple TV+, and that lesson is, not everyone has to compete to be number one.
When Apple announced it's streaming service my first thought, and the thought of many analysts was how will Apple compete with Netflix? How long will it take Apple to achieve Netflix like numbers, and what will Apple's value be if they can achieve Netflix like numbers. Those were the wrong questions and that was the wrong outlook.
For Apple to win, Apple TV+ alone doesn't need to come close to Netflix's 200 million subscribers, because again, Apple TV+ is a part of an ecosystem, and the value is in the ecosystem as a whole. Apple TV+ subscribers, Apple Music subscribers, Apple Podcast subscribers, Apple News subscribers, Apple Games subscribers, Apple Fitness+ subscribers. All of those subscribers buying into different services adds up to a nice chunk of revenue.
The same will apply for Netflix and their move into gaming. For anyone looking at Netflix to take on Stadia or Playstation or Microsoft, they're looking at it all wrong. Like Apple, Netflix's gaming arm doesn't have to overtake or even go head-to-head with any of the big gaming companies for it to be a success.
Why It Makes Sense
Sometimes, when I'm watching TV, while scrolling through TikTok, with my iPad on my lap, I often forget that in other parts of the world, a smartphone is the only device some people have. Netflix understood this and offered a low-cost mobile-only version of its service in India. Netflix could roll this plan out to other territories in Asia and Sub-Saharan Africa. A mobile gaming service add-on could go a long way in keeping Netflix subscribers in less developed countries stuck to the platform.
Also, mobile gaming is addictive. I have had a few battles with mobile gaming addiction. Temple Run, Angry Birds, Flappy Birds, The Sims, Words With Friends, have all stolen way more time from me than I care to admit. Luckily, I was able to avoid the FarmVille and Candy Crush trap, which did an amazing job in keeping people stuck to Facebook. Finding or creating a hit game is just as difficult as creating a hit streaming series, so this won't be an easy task, but when a mobile game hits, it really hits.
Last year we witnessed Among Us, a game published in 2018 find massive success, to the point where Democratic Representative Alexandria Ocasio-Cortez was able to garner a shocking 440,000 viewers to watch her play Among Us and talk politics. In comparison, Donald Trump and Joe Biden streams on Twitch for campaign events pulled in 6,000 to 17,000 viewers.
Although I don't think Netflix is going to go deep down the gaming rabbit hole and get into full fledged cloud gaming and game streaming and get a gaming team; gaming, even if it's just on a mobile level, if done correctly can be big for the company.
Can't Please Everyone
Netflix gaming will not be a source of additional revenue according to Netflix CEO Reed Hastings, it's more of a way of making a Netflix membership more valuable to consumers. Michael Patcher, a senior analyst at Wedbush called Netflix's gaming plans dead on arrival. Patcher's main concern is Mike Verdu, the person Netflix hired to head its gaming business.
Verdu is a gaming exec who has spent time at EA Mobile, Oculus at Facebook, and mobile gaming company Zynga. On paper he has the experience, but to Patcher, Verdu hasn't developed a good game since 2001 and isn't the right person to lead this venture.
Growth on Pause
In the streaming era, Netflix's recent quarter has been one of its lowest quarters for growth. The company added 1.5 million new users to service, but it also lost 430,000 subscribers in North America. While it appears North America may be reaching saturation, there are areas internationally that have big growth potential.
The Asia is Netflix's smallest region with just under 28 million subscribers. More than half of the world's population can be found in Asia, which includes China's estimated 1.4 billion people (Netflix is banned in China).
From looking at where Netflix is in its Asia expansion, it appears growth may not be fully over for the company, but merely on pause. If the company can figure out its combination for success in Asia, big time subscriber growth could be back in full swing at Netflix.
Netflix to the Moon?
Evercore ISI analyst Mark Mahaney believes Netflix's recent quarter is setting the stage for a rebound in fundamentals and shares. Mahaney feels the stock will surge from here, and presumes Netflix could hit 500 million subscribers and bring in close to $80 per share in profits by 2030.
Since hitting its all-time high at the time of $567 in July 2020, the stock has been in a trading range. The stock has traded to and above the $550 level five times since July 2020, but that area seems to be where the buying fades. In the same time span, the stock has established its support around the $460 area.
I'm in the Mahaney camp that Netflix's stock is set to surge. I'm a believer in the gaming plan, and see this as a good way to keep Netflix subscribers locked in. I also think, with COVID-19 restrictions lifted in many places, content production will ramp up, and Netflix will again drop another viral hit on the world. I still believe the company needs to look into a music streaming service to add to its bundle. Last year, U.K. start up MelodyVR purchased streaming service Napster, formerly known as Rhapsody for just $70 million, that would've been a drop in the bucket for Netflix.
With growth on pause for now, Netflix has moved to creating value for its current subscribers. If it can accomplish being "sticky" and hit another stage of growth, watch out.