Harvard Business review

Gaming Isn’t Netflix’s Best Opportunity for Growth

Netflix is planning to launch video games as part of its existing subscriber offer. This is an example of an adjacency strategy, but in this case it’s not the smartest play. Growing into adjacent markets makes the most sense when it allows a company to cross-sell or create an entirely new kind of revenue-generating business. Neither is true in this case. The article offers three alternative strategies that Netflix could use to move into adjacent markets that fit better with its core business and are more likely to help it grow revenue.

This past summer, Netflix announced plans to offer gaming on its streaming platform. In early November, the first live games launched on Android. The games are included alongside the streaming service’s movies and TV offerings and bundled within the same monthly price. Netflix hired a gaming executive with experience at Zynga and Electronic Arts to lead the effort.

The move from movies and TV shows into gaming is an example of an adjacency strategy. Will it succeed? Probably not.

Whether or not an adjacency strategy succeeds is a function of why the company is doing it. This “why” tends to fall in three buckets: to defend the current core business, cross-sell the current core business, or create an entirely new core business. All three can add value, but the first two tend to yield timid offerings that are anchored in the past, whereas the last strategy yields bold, differentiated offers that are a much bigger bet on the future.

In particular, adjacency strategies that defend the core often occur at companies with successful and strong core businesses. These companies have overwhelming incentivizes to focus on protecting their golden goose. They also lack the requisite skills to really put their best talent and resources into a new adjacency, and often end up with copycat offers. Consider an example from the 1990s: Microsoft’s Internet Explorer was really designed to protect Windows and Office. Google+ was really meant to defend its dominant search business. Neither offers were strong enough to stand on their own.

Netflix’s adjacency strategy is clearly a defend-the-current-core-business strategy. They are offering new benefits to existing customers at no incremental charge. (If they charged more to add gaming, it would count as category cross-selling.) The hope is that the higher variable cost Netflix will bear to add gaming will be offset by lower churn and increased time spent on the platform. This may ultimately set the stage for future price increases, which is an important part of Netflix’s strategy. Netflix currently has 214 million subscribers, but subscriber growth has been slowing. These trends suggest price increases will be increasingly important to drive future revenue as new subscriber acquisition becomes more difficult.

By giving away gaming for free, Netflix is signaling to customers that their gaming offering is a timid one that will likely be good, but not great nor different. Netflix should have been bolder by charging for games, given consumers are more than willing to pay for amazing new games and gaming related content. According to one study, 71% of millennials game and of those, they spend $112 per month on gaming content.

Adjacency strategies that aim to cross-sell the core business tend to be more successful, as the new offers must be different and worthy enough to warrant incremental spending by customers. When Apple launched the iPod as “a thousand songs in your pocket,” it was only a matter of time before they got into selling music itself. Apple generated $4.1 billion in streaming music revenue in 2020. Another example: the payment technology company Square recently acquired Afterpay and its Buy Now, Pay Later product and platform. The company hopes to cross-sell Square’s 30 million monthly active users to begin using Afterpay’s products. Because Afterpay is a different variant on credit (six weeks of credit for free without fees), Square goes beyond just offering convenience of cross-selling a category their users could have gotten easily on their own. The new offering is cross-selling something different, which likely generates excitement and intrigue with their user base.

Netflix could aim higher by either building or buying its way into a gaming offer that is differentiated enough to be worthy of an incremental price premium. But the ideal adjacency strategy is to create an entirely new category.

The following three guiding principles can help Netflix do exactly that.

Stay true to and anchored in the core benefit of Netflix.

Netflix’s mission is to entertain the world via storytelling. Specifically, Netflix says: “We are the world’s biggest fans of entertainment, and we’re always looking to help you find your next favorite story.”

What makes Netflix so great is its ability to offer the widest, never-ending variety of stories that we can “lean back” and watch and often multi-task. According to Nielsen data in 2018, 45% of consumers are on their phones or a second screen while watching TV. This is why gaming is an odd fit for Netflix, as gaming is a “lean-forward” activity. Gaming is an active versus passive activity, engaging versus relaxing.

Netflix should look for adjacencies that are a better fit with the “lean back” nature of passively engaging in world-class storytelling. Or better yet, create them.

Follow their superconsumers’ passion for stories.

Superconsumers are the top tier of consumer that buys, cares, and knows the most about the category. A superconsumer of one category tends to be a superconsumer of nine other categories, some of which are obvious and some are not.

For instance, Squid Game is the South Korean show that is trending #1 across 90 countries and is on its way to being the most-watched show on Netflix. What does a Netflix superconsumer do after binging all nine episodes in a single day? They look for more background content on the show like reviews, easter eggs, “the making of” content, and background on the actors and directors. Much of this is ceded to amateurs on YouTube, but Netflix could easily create extra content about a hit show that could be as engaging as the show itself.

Gaming supers don’t just play games; they also watch hours of other people playing video games. Gamers 18-25 years old spend 77% more time watching others game online than watching broadcast sports. Netflix could bring high production value to create the ESPN of video gaming and bet big on the future of eSports media.

Create new categories worthy of a price premium.

New categories beget new categories. When Netflix dropped the entire season of House of Cards for the first time, it created the category of binge watching. When Netflix made streaming nearly ubiquitous on phones and tablets, it enabled asynchronous solo viewing. This left a gap in social viewing, which is another category that is ripe for Netflix to create.

Creating a new category requires three key ingredients: a breakthrough offer, a breakthrough business model, and a breakthrough data flywheel. In this case, the breakthrough business model could be many things. Netflix could create a separate set of channels within the existing platform, unlocked by a premium subscription. Netflix could acquire a messaging/community platform like Discord, where gamers currently congregate to connect and talk about gaming and organize communities of superconsumers to connect. It could acquire Patreon, where creators share and monetize content and use it to allow superconsumers, actors, directors, and other show runners to connect directly with other superconsumers. Superconsumers could help improve the authenticity and quality of the Squid Game Korean-to-English translations. All of these would easily warrant a price premium to the current subscription.

“Content about the content” plus community-based platforms like Discord or Patreon would allow for Netflix to further fuel the passion of superconsumers who love their content and build new revenue streams that augment its core business.

Best of all, these business models throw off massive amounts of data about its consumers. This data can solve one of Netflix’s core data gaps — namely, who within the household is actually watching what content. This knowledge is highly predictive of what other content to create, further separating Netflix from any would-be competitors.

These strategies would also be more ambitious than attaching some games to its existing platform. If Netflix really aspires to find growth opportunities beyond its existing movie and TV show content, these sorts of adjacency strategies are more likely to help drive it.

 

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