Cloud gaming is a burgeoning market, with Grand View Research estimating that the industry will grow at a compound annual rate of 45.8% from 2022 to 2030. As a result, multiple companies have tried their hand at cloud gaming, and the industry is gradually learning what the most successful approach looks like to consumers. For instance, Microsoft has succeeded with its cloud gaming feature, which is a bonus to its Xbox Game Pass subscription service.
However, not all companies have flourished in the industry. Alphabet launched its cloud gaming service, Google Stadia, in November 2019, a subscription-based platform where users could stream games from nearly any device and anywhere with a stable internet connection. Unfortunately, Alphabet's strategy with Stadia was flawed from the start and led the company to announce the shutdown of its service at the end of September.
Now Netflix (NFLX +1.35%) has revealed it is "seriously exploring" the creation of a cloud gaming service as part of its Netflix Games platform. Alphabet may have failed in the cloud gaming space, but Netflix is far better equipped to succeed and truly take advantage of the quickly growing market. Here's why.
A history of beating odds
Netflix has dominated the video streaming market for nearly 15 years, so it's easy to forget that it started as a mail-in DVD rental service. The company entered the movie rental industry when Blockbuster ruled, but Netflix hoped to offer something new with its mail-in service. The odds were stacked against it, but the company won consumers over with its ease of use and its later-introduced subscription model. Netflix's success eventually prompted Blockbuster to launch its own mail-in subscription service.
After hitting a market capitalization of $1.83 billion in its first decade of business, Netflix took an innovative risk in 2007 when it invested millions of dollars in a video streaming service that launched as a free feature to its mail-in DVD subscription. As one of the first, the company was betting on a technology that consumers would either heartily embrace or flat-out reject.
Thankfully for Netflix, the gamble paid off, and the company grew into the $128.7 billion business it is today. The streaming titan took a similar risk when it launched Netflix Games in 2021, with multiple critics still apprehensive about how the company will profit from games. However, its slow ease into gaming and now potentially cloud gaming is already a more promising strategy than Alphabet took with Google Stadia.
A better strategy
Stadia had consumers pay full price for console-style games and pay a subscription service on top of that to access and play the games through cloud streaming. Without the monthly fee, users were unable to access their Stadia game library. While Alphabet's cloud gaming technology was impressive, its service had an expensive entry point and didn't offer enough to convince consumers to buy games on Stadia rather than on Microsoft's Xbox or Sony's PlayStation.
However, Netflix has the advantage of having its application already downloaded on over 223 million subscribers' devices. Half the battle is getting consumers to visit a service, and Netflix can leverage its large audience to attract users to its games service as long as it delivers with content.
NASDAQ: NFLX
Key Data Points
The company has used caution with its venture into games by starting small, offering a library of about 25 mobile games as it slowly expands. Engagement is still low, as Apptopia reported in August that fewer than 1% of Netflix subscribers play its games. However, the company has used the past year to acquire various game studios and develop relationships with some of the biggest developers in the industry.
The company has multiple games in the works based on popular titles such as Assassins Creed, Tomb Raider, The Division, and more. These projects see Netflix forming relationships with major game studios, which could help attract companies to offer their games on its cloud gaming service in the future. For instance, working closely with Ubisoft for an Assassins Creed TV show has already led to plans for three mobile games that will be exclusive to Netflix Games.
Is Netflix stock a buy?
Netflix has more than proved its ability to host a successful video streaming service, suggesting it has the knowledge and infrastructure to break into cloud gaming. Adding Netflix Games as a free feature to its already-established subscription -- just as it did when launching its video streaming service -- would be a tried and true strategy for venturing into a new market.
Netflix's stock is 51% down year to date after a rocky first half of the year but has risen 28% in the last month after a glowing third quarter. The company has a promising future with a return to subscriber growth and moves to bolster the value of its subscription with a venture into games. So now might be the perfect time for a long-term investment in Netflix.
