Netflix first revealed its ambitions to offer streaming distribution of its games back in September 2021 through a recruitment ad. The job description for Product Manager: Games outlined that ‘…you will help create the long-term strategy and vision for cloud games on Netflix…’. Fast forward to November 2022, and Netflix has now talked publicly about its cloud gaming ambitions. It has confirmed that it is pressing ahead with its plans; suggesting that internal testing must have progressed well and that the commercial ramifications of such a move are not enough to deter the company at this point. 

This confirmation of strategy comes at a challenging time for cloud gaming. Google has announced it is set to close its own cloud gaming service, Stadia, in January 2023 due to lack of adoption; Deutsche Telekom closed its Magenta service at the beginning of 2022, and many other pure game streaming services remain nascent and small. So, why is Netflix pursuing this strategy?

Streaming as a value-added alternative to downloading games 

We’ve all heard how the cloud gaming market is going to be worth $10bn+ by 2027, but these industry forecasts tend to lump big chunks of Xbox Game Pass and PlayStation Plus spending into the market outlook. This approach overstates the commercial importance of streaming of games in the near- and medium-term. At Ampere, we follow a more nuanced approach, by segmenting our games subscription service forecasts by distribution: download-only; download and streaming; and streaming-only services.

As shown in our market data, services that offer download distribution are dominating the subscription market, although it is also true that streaming distribution is slowly establishing itself as a useful value-add for the biggest download-centred games subscription services. Use-cases such as trying out games before downloading or accessing content away from the console or PC are driving usage, as is Microsoft’s initiative around touch controls for use on mobile devices. In contrast, pure-play cloud gaming subscription services remain small, with the biggest, Nvidia’s GeForce Now, underpinned by the company’s deep pockets, and with many independent efforts struggling to gain noteworthy scale. 

We expect Netflix to adopt this value-added approach with its own cloud gaming initiative and for it initially to be focused on the existing catalogue of mobile games. Streaming may also allow Netflix to overcome the user-journey challenges the company currently faces with its app store implementations, where subscribers are asked to navigate to the store to download the game outside of the main subscription video app. As Netflix already lists its games individually within the app stores, it may not fall foul of store rules when deploying a more streamlined user experience. 

This value-added approach will allow it to test how subscribers take to the technology and how this will impact its distribution costs as adoption scales. It will also open the door to a more fundamental shift in distribution further down the line, with the potential to include new types of interactive experiences or higher-end games and to serve content to a range of devices. However, questions remain over how these cloud games will be distributed onto devices across closed ecosystems. 

Streaming mobile apps is substantially cheaper than serving high-end games 

The cost implications of streaming games should not be underestimated. The cloud gaming industry is littered with service casualties over two decades, many of which failed to make commercial sense of the high service delivery and infrastructure costs. Cloud service companies are well-placed to mitigate these costs, but independent service providers are more commercially exposed. This is especially true of services that do not enable or allow hybrid monetisation of games, such as supporting titles with in-game spending to drive the revenue opportunity. Netflix has of course positioned its games offering as having ‘no ads, no additional fees and no in-app purchases’.  

Another reason we expect Netflix to initially focus on mobile games is that it will be substantially cheaper and easier to build out the necessary GPU-based infrastructure in its existing AWS-based deployments to stream these games compared to high-end console and PC titles. For example, Intel’s new Data Center GPU Flex Series has been optimised with Android-based cloud gaming in mind and, according to the company, can achieve between 40 and 70 simultaneous streams depending on the configuration, far higher than Microsoft’s Xbox or Nvidia’s GeForce Now instances in the cloud. However, server deployments will still need to be close to the end user and deliver low-latency streams which can provide round-trip times for gamer inputs and responses that are cloud gaming-friendly, meaning that Netflix will have to adjust its infrastructure strategy to suit.  

Many smartphone users in key Netflix markets can’t play the latest games

While Netflix is expected to pursue a value-added approach, streaming of mobile games could have more immediate relevance in important mobile-first markets around the world. This is because huge numbers of smartphone users in markets where Netflix is seeking to build more traction for its service have low specced Android devices that can’t play the latest games. If Netflix builds a game streaming capability that these audiences can successfully access, this could add significant value to the company’s offer.   

As such, pursuing a streaming strategy for its mobile games is potentially a legitimate and important building block to reaching new audiences in markets such as India, Southeast Asia and Latin America. However, even if this distribution strategy allows the company to reach new audiences, it will have to overcome other factors such as a low willingness to pay for comparatively expensive subscription services and potentially high data consumption for end users. Partnering with telcos in these markets could potentially help the company overcome some of these factors.  

Netflix will also have to convince users that its own product approach of no in-game monetisation or ads is better than the entrenched mobile games market dynamic of free-to-play titles that are monetised in-game. Without the in-game monetisation dynamic and the gameplay structure which facilitates that monetisation, Netflix is likely to struggle to capture ongoing and deep engagement. Ampere predicts that eventually, Netflix will relent and introduce in-game monetisation to its mobile games. That added revenue stream could offset the additional streaming distribution costs Netflix will be faced with.

Entirely new content opportunities

Cloud gaming could also enable entirely new interactive content experiences, which would align with Netflix’s video content more strongly, and would be substantially cheaper to serve and run. Examples of new experiences include massively interactive live events or MILEs as defined by cloud gaming company Genvid Technologies. MILEs are light-touch, interactive broadcast or streamed events, which can scale to allow thousands of users’ input into how the event turns out. Genvid has already experimented with MILEs in partnership with Facebook/Meta and is currently building Silent Hill: Ascension in conjunction with Konami. Like Netflix’s own experiments in interactive video content - including Bandersnatch and the newly announced Triviaverse - MILEs or similar could help bridge the gap between video and games, while also differentiating Netflix from other subscription services.