In August 2023, Netflix began beta testing its new cloud gaming service, which is an adjunct to the mobile games Netflix debuted in 2021. Netflix’s market entry paints cloud gaming –at the very least–as a highly complementary content category for premium content providers, the next frontier of disruption as consumer entertainment experiences are digitally transformed. Netflix’s bold market launch elevates cloud gaming to table stakes that all content services need to include to retain their subscribers. After distinguishing cloud gaming from mobile gaming, this post will discuss the opportunity Netflix is siezing.
FIGURE 1. Netflix is beta testing its cloud gaming service with two titles, including Oxenfree.
Console vs. Mobile vs. Cloud Gaming
When most of us think of gaming, we visualize console-based games played on Microsoft Xbox or Sony PlayStation consoles or on tricked-out game computers with high-end CPUs and powerful GPUs (graphical processing units). While consoles and computers can deliver the highest performance, more games are played on mobile devices simply because they are pervasive and always available. Remember, in the early days of streaming, it was still physical media (DVD and blu-ray) that offered the highest video quality. And yet, due to convenience and content availability, streaming was adopted. Today, this gap no longer exists as the very best UHD video experiences were available first on streaming, even before UHD BD (blu-ray).
Mobile gaming involves downloading and installing games on a smartphone or tablet. Mobile games are typically smaller and less complex than console or PC games because they are run on less powerful CPUs and GPUs with smaller screens. But if you’ve ever lost an hour or ten playing Call of Duty or Words with Friends on your smartphone, you know that mobile games can be quite compelling. As of October 20, 2023, Netflix offered 77 different mobile games, available on iPhone, iPad, and iPod touch running iOS/iPadOS 15 or later and Android phones and tablets running Android 8.0 or later.
FIGURE 2. Some of Netflix’s mobile games.
In contrast to mobile, cloud gaming involves playing video games over the internet without first downloading and installing the game on your device. As of late October 2023, Netflix’s limited beta test for cloud gaming in Canada, the UK, and the US involved two cloud games, Oxenfree and Molehew’s Mining Adventure, playable on a limited set of Smart TVs and OTT dongles using your iOS or Android phone as a controller.
Why cloud gaming in addition to mobile? There are multiple advantages. First, since the games are rendered in the cloud, publishers can deploy powerful CPUs, GPUs, and transcoders that can handle the most complex games. Any cloud-capable game should play on any device with a standard browser without downloads, eliminating compatibility and storage issues. This is better for both users and publishers, who can reach a broader audience by supporting a single cloud platform. Because the games are cloud-native, adding a social multiple-player functionality should be simpler.
The primary technical challenge for cloud gaming providers is minimizing latency between gamer input and frame display and maximizing frame quality. Keep this in mind, because the latency issue is one that Netflix is uniquely capable of addressing, as we’ll discuss below.
The primary operational challenge for video engineers is designing a cloud infrastructure that can support the business model selected by the provider, which, in Netflix’s case, is a complementary addition to the company’s extensive library of premium content. Operating a quality first streaming platform is costly and when you layer in the responsiveness needed for gaming where typical end-to-end latency can be no more than 100 miliseconds, many publishers and gaming companies have concluded it’s not possible. But, Netflix has found a way which we’ll explore below.
Cloud Gaming: A Target-Rich Environment
FIGURE 3. Savanta’s report projects favorable growth for cloud gaming and Netflix in particular.
A recent report from market research company Savanta suggests that the cloud gaming sector is on the rise and that Netflix is well-positioned to capitalize on it. Savanta compiled the report, entitled the 2023 Gaming Report, from nationally representative online surveys of a total of 12,183 adults aged 18+ across seven core Western markets: Canada, France, Germany, Netherlands, Spain, UK, and USA. The report is authored by Dr. Nick Baker, and you can access a copy here (registration required).
The report starts by distinguishing between committed and casual gamers, a dichotomy used throughout the report. According to Savanta, committed gamers are deeply involved in gaming, and play more frequently, play more complex games, and are more likely to stay updated with gaming news, trends, and hardware. They seek challenges and achievements and often engage in multiplayer or competitive gaming scenarios.
In contrast, casual gamers play games more for entertainment and relaxation rather than competition or challenge. Their gaming sessions are shorter, and they prefer simpler games that don’t require a significant time investment or specialized skills.
Savanta’s research indicates that 33% of committed gamers and 10% of casual gamers have already tried cloud gaming services. The experience has been very positive; 82% who have used cloud gaming say they will likely return, including 92% of US gamers. A significant 70% of the respondents primarily play on their smartphones, and over 52% prefer freemium games.
Netflix’s cloud gaming service was not yet in trials while the surveys were being collected, so all Netflix-specific data relates to mobile gaming. Here, looking specifically at Netflix subscribers, 22% had tried Netflix gaming, including 33% of US subscribers. Seventy-seven percent of those who have already downloaded Netflix games said they would likely do so again, compared to 45% of people who had not heard about Netflix games. Interestingly, mobile game downloads were highest among 35-44-year-olds.
So, 82% of those who have tried cloud gaming say they will return, and 77% of Netflix subscribers who have tried Netflix mobile gaming intend to play again. Not surprisingly, over 50% preferred freemium games. As you’ll see, all these statistics present a positive picture for both cloud gaming in general and particularly for Netflix.
Why Netflix wants to Game
To understand the strategic significance of gaming to Netflix, let’s explore why Netflix entered this market. Netflix has long considered video games as competition for consumer screen time, stating in its 2019 earnings report that “we compete (and lose to) Fortnite more than HBO.”
In an interview in the LA Times, Netflix VP of games Mike Verdu added, “Games embody a fusion of creativity and technology, which makes them a natural next step for Netflix, a company that is also balanced between creativity and technology, art and science. We want to deliver the best entertainment experiences to our members, and that includes great games.”
The article then quotes Kevin Westcott, who leads Deloitte’s U.S. technology, media, and telecommunications practice, who stated, “The more entertainment services that are on a platform, I believe it will make it much more sticky and reduce churn.”
FIGURE 4. The article title says it all.
Churn is obviously a problem for all subscription services, particularly in mature markets like the United States. According to this article entitled Tackling the Problem of Subscribers Who Binge…Then Bail in the Harvard Business Review, Netflix’s U.S. cancellations grew from 8.9 million in 2019 to 15.1 million in 2022. At an average subscriber fee of $15/month for 12 months, that’s just over $2.7 billion in lost revenue from those lost subscribers in a single year.
Deloitte’s excellent Digital Media Trends 2023 report adds age groups to these numbers. The survey found that “Overall subscriber churn for paid SVOD services over a six-month period is 44% according to our survey. For Gen Z and Millennial consumers, those numbers jump to 57% and 62%, respectively. Similarly, around a quarter of consumers have “churned and returned,” cancelling a paid SVOD subscription only to renew that same subscription within a 6-month period. Again, these figures jump by double digits for Gen Zs and Millennials, who often subscribe to watch specific shows and movies and then cancel when they’re done—only to resubscribe to watch a new season or film.”
FIGURE 5. Deloitte’s survey shows that Gen Z and Millenial consumers were most likely to cancel an SVOD service.
Returning to the Harvard Business Review article, one anti-churn strategy the authors recommended was to “balance its bingeable content with content consumers want to consume slowly and over time.” The article recommends sports and fitness content, but mobile and cloud games are similarly not bingeable – once you’re hooked on a game, you’re generally hooked for years.
How effectively does Netflix’s gaming strategy target subscribers most likely to cancel their service? According to this report, GenZs are currently 11-26, while Millenials are currently 27-42. As reported above, Netflix’s mobile game downloads were highest among 35-44-year-olds, which cuts a major swath across the subscribers who actually pay for the service and are most likely to binge and bail.
Signficantly, at least in the short term, Netflix’s gaming strategy doesn’t need to deliver additional revenue to keep the platform afloat (like Stadia). If it reduces churn by even a modest percentage, it should more than cover the added costs.
Netflix isn’t Playing Defense
That said, Netflix’s foray into gaming is much more than a defensive effort to minimize churn; it’s also an “example of Netflix (NFLX) playing offense, not just defense.” So says Tom Forte, senior research analyst at D.A. Davidson. As summarized in this CNN article, “This segue also provides another way for Netflix to monetize some of its more popular franchises, including the “Stranger Things” series.”
Whether for defense or offense, Netflix is clearly in it to win it. As stated by co-CEO Greg Peters in the Q3 2023 earnings call, “We believe that we can build games into a strong content category, leveraging our current core film and series by connecting members, especially members that are fans of specific IPs with games that they will love. [I]f we can make those connections…we’re essentially sidestepping the biggest issue that the mobile games market has today, which is how do you cost-effectively acquire new players?”
Explaining the role games played in Netflix, Peters continued, “If you think about the…variety of content and entertainment that we’re offering, games just add one extra layer to that variety and that depth. [W]e’re also seeing performance metrics that support that these fundamental strategic hypotheses are sound. So, games engagement right now on our service drives core business metrics in a way which is incremental to movies and series.”
Looking ahead, Peters added, “But the main challenge ahead of us …is that our current scale and, frankly, our current investment level are both very, very, very small relative to our overall content spend and engagement. So now, our job is to incrementally scale to the place where games have a material impact on the business. We’ve got ambitious plans there.”
Netflix Open Connect is the Perfect Platform for Cloud Gaming
Where Netflix’s core assets provide fertile ground for compelling spin-off games, Netflix’s technology provides a significant competitive advantage that few others can match. Specifically, Netflix has its own content delivery network (CDN) called Netflix Open Connect, which has over 2,000 points of presence (PoPs) around the world. This extensive network enables Netflix to deliver its content to users quickly and reliably, even in countries with limited internet bandwidth.
FIGURE 6. Netflix Open Connect has over 2,000 points of presence (PoPs) around the world.
Here’s how it works. Netflix has a network of data centers, internet exchange points, telecom and colocation facilities where it has installed large scale storage devices called Open Connect Appliances (OCA). Each night, Netflix downloads files to these devices so that VOD content requested by a Netflix customer can be delivered from these local servers.
In addition, Netflix offers local Internet Service Providers (ISPs) these same appliances for local storage and delivery to their customers. Since Netflix offers the devices for free, and since they significantly reduce Netflix-related capacity requirements into the ISP, and improve the Netflix playback experience, many ISPs install them.
Each location with an OCA is called a Point of Presence, or PoP. While the exact number of PoPs in Netflix’s Open Connect network is not publicly available, it’s estimated to be over 2,000 and constantly growing. These PoPs are connected via efficient peering arrangements, and high-speed interconnects that minimize the latency of any content that’s not on a local PoP and must be delivered from a more remote server.
The high-speed connections between the ISPs and the Netflix servers located in each PoP should minimize latency – which to optimize the gaming experience, would enable Netflix to place cloud gaming servers in any owned PoP. These servers “on the edge” will reduce latency to the minimum enabling Netflix to benefit from custom hardware and gaming optimized architectures.
The Bottom Line
Clearly, mobile and cloud gaming markets are hyper-competitive and very dynamic, and success isn’t assured for any market entrant. But Netflix has a unique combination of cash to invest, popular video franchises from which to spin off games, a significant technological advantage in Netflix Open Connect, and, at least in part, an anti-churn strategy that means that the service doesn’t need to generate game subscriptions to survive. Netflix is well positioned to succeed in cloud and mobile gaming, and we’re betting that it will making both gaming mediums an essential class of content for any competing service.
Jan Ozer
is Senior Director of Video Marketing at NETINT.
Jan is also a contributing editor to Streaming Media Magazine , writing about codecs and encoding tools. He has written multiple authoritative books on video encoding, including ‘Video Encoding by the Numbers: Eliminate the Guesswork from your Streaming Video’ and ‘ Learn to Produce Video with FFmpeg: In Thirty Minutes or Less’ and has produced multiple training courses relating to streaming media production.
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