Building an ‘entergament’ strategy: Why Netflix and Disney are jumping into the gaming segment

Video games are the fastest growing form of entertainment. Even before COVID, people of all ages and demographics have been playing more video games. Furthermore, younger people such as millennials and Gen Z increasingly prefer playing (and watching other people play) video games to watching TV and sports. It is also the biggest digital entertainment sector from a monetary perspective, by far. According to estimates from Statista’s Digital Market Outlook, digital gaming revenue amounted to USD 134 billion worldwide last year, exceeding the combined total for digital video, music and publishing. Besides, as reported by The State of Online Gaming Survey 2021, the average gamer spends more than 8 hours per week playing video games (25% play for more than 12 hours). It represents a 14% increase compared to last year’s survey. This number is forecasted to be even bigger in the following years.

Driven by the expansion of mobile Internet access and growing connection speeds, the increasing number of mobile and streaming devices leads to a steady growth in demand. In fact, the mobile gaming industry is predicted to be worth USD 272 billion by 2030.

Regarding the gambling sector, up to December 2021, total year revenue rose 73.9% to USD 48.3 billion. This includes sports betting revenue (USD 669.1 million, +106.4% y-o-y up to December 2021). Last year was even better than 2019 (approximately, 12% more in revenue).

SMART EXPANSION STRATEGIES

These amazing stats for 2021 explain the interest of companies such as Disney and Netflix to expand their businesses to this segment. As sports betting becomes more widely accepted by the public, the family-friendly brand that Disney owns is less in jeopardy by making the move into the gambling space. Bob Chapek, the CEO of Disney Co., said the company has decided to focus on building out partnerships in the sports betting industry, through its ESPN brand. “We’re moving towards a greater presence in online sports betting. Given our reach and scale, we have the potential to partner with third-parties in this space in a very meaningful way,” he underlined. A few years ago, Disney allowed ESPN to start creating content centered on the sports betting industry. The sports media giant partnered with Caesars Entertainment in May 2019 to create a studio above The LINQ on the Las Vegas Strip for its gambling-related television shows. Last June 2021, ESPN also announced that it was looking into branding its own sportsbook. Disney was in talks with several sports betting operators (BetMGM, Caesars Sportsbook, and DraftKings) to partner with on the sports betting front. The partnership would likely manifest itself in the launch of ESPN’s sportsbook, but that could happen in a number of different ways. The operators could pay Disney to use the ESPN brand and operate it independently of Disney or the agreement could come with split ownership of the sportsbook that would allow for exclusive advertising on Disney programs. A partnership with one of the larger operators could also offer Disney an opportunity to enter markets where those operators already received licenses.

For its side, Netflix’s strategy is different. Its advance into video gaming (specifically, mobile gaming) has no intention to be a standalone offering, but an integral part of its core product. Netflix wants more customers’ time and attention, and they are investing in games for that. With the rise of high-performance smartphones rivaling the gaming function of many handheld consoles, expanding into mobile gaming is a smart and predictable move for Netflix. Since this company already has such a gigantic, loyal viewership, it’s interesting to see what the potential revenue would be for them when they inevitably release the gaming versions of their most-viewed titles.

SOME KEY NUMBERS FOR DISNEY

Since the U.S. Supreme Court struck down a ban on sports betting in 2018, 32 states and Washington, D.C. have launched legal markets. By 2030, the industry is expected to produce USD 30 billion in revenues off an estimated USD 400 billion in total wagers, according to Macquarie Research. Today, some 34% of sports fans bet weekly on games in the U.S., according to data firm Ampere Analysis, and spend an average of USD 51 a week. Sports enthusiasts are also spending around 3.2 hours a week on fantasy gaming, the firm shows.

In terms of internal Disney numbers, ESPN+ passed 17.1 million paid subscribers (a year-on-year rise of 66%) as Disney streaming revenue hit USD 16.3 billion for 2021. Average monthly revenue per paid ESPN+ subscriber for the 4Q 2021 was USD 4.74, up 4% on the same period last year. Now, Disney has 179 million subscribers across its direct-to-consumer (DTC) portfolio. In fact, the company’s streaming bundle includes Hulu, Disney+, and ESPN+, with sports accounting for 90% of “the most watched telecasts last year.”

While media companies (from Fox to Sports Illustrated) have already cut deals with sports betting groups, Disney inked a 10-year NFL rights deal that will begin in 2023. That’s why Chapek recognized gambling could help the company by creating new revenue streams and attracting and keeping a younger audience. “We do believe that sports betting is a very significant opportunity for the company, and it’s all driven by the consumer, particularly, the younger consumer that will replenish the sports fans over time and their desire to have gambling as part of their sports experience.”

In order to attract a younger audience, Chapek commented, Disney must “seriously consider getting into gambling in a bigger way, and ESPN is a perfect platform for this.” He also explained: “Gambling does not have the cachet now that it had, say 10 or 20 years ago, and we have some concerns as a company about our ability to get in it without having a brand withdrawal. Given all the research that we’ve done recently, it will not be the case. It will actually strengthen the ESPN brand when you have a betting component, and it has no impact on the Disney brand. Therefore, to go after that demographic opportunity plus the, of course, not insignificant revenue implications, that is something that we’re keenly interested in and are pursuing aggressively.”

THE CASE OF NETFLIX: GAMING FOR ENGAGEMENT

In November 2021, Netflix Games rolled out on the Netflix mobile app (Android and iOS). Users (subscribers) were able to choose from different games: Stranger Things: 1984; Stranger Things 3: The Game; Shooting Hoops; Card Blast; Teeter (Up); Hextech Mayhem: A League of Legends Story; Asphalt Xtreme, and Bowling Ballers.

It was part of a big move from the company, which hired Mike Verdu (former Facebook, Electronic Arts and Zynga executive) as VP of Game Development, reporting to COO, Greg Peters. Netflix has also appointed former president of games at Scopely, Amir Rahimi, as VP of its own game studios. He will report to Verdu, and oversee all the games the company will make available to its members. Besides, the entertainment provider acquired Oxenfree developer Night School Studio, suggesting more ambitious titles are forthcoming. These games are included alongside the streaming service’s movies and TV offerings and bundled within the same monthly price.

Pushing into games would be one of Netflix’s boldest moves yet. They have been seeking ways to keep growing, especially in more saturated markets such as the U.S. The company remains well ahead of streaming rivals such as Disney+ or HBO Max, but it added fewer subscribers than expected in its most recently reported quarter.

The move from movies and TV shows into gaming is an example of an adjacency strategy. 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. The hope is that the higher variable cost Netflix will bear to add gaming will be offset by lower churn and augmented time spent on the platform. This may ultimately set the stage for future price rises, which is an important part of Netflix’s strategy. This company currently has 214 million subscribers, but subscriber growth has been slowing. These trends suggest price increases will be very important to drive future revenue as new subscriber acquisition becomes more difficult. 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.

PROVIDING GAMING EXPERIENCES VIA MOBILE

However, the concept is not to create a “Netflix of Games” like XBOX Game Pass, but simply just to add mobile games that can be played on the phone through the Netflix app with the purpose to increase engagement. In this sense, mobile games are technologically easier for Netflix to create and maintain. Gamers will not require any special hardware other than their phone, and input lag and latency are less of an issue with simpler tap-and-play games. Netflix understands better than anyone the technical challenges of streaming premium video game content at an acceptable latency, and most subscribers of Netflix who play video games would already own a console or gaming PC. Furthermore, as many people have pointed out, Netflix does not have the knowledge or capabilities to make premium AAA games such as Call of Duty or Grand Theft Auto. By focusing on mobile games, Netflix can build up its publishing capabilities and learn about the games market before moving up and investing the capital to create larger, more sophisticated games as technological advances for game streaming improve.

Lastly, the economics should be very attractive for Netflix. Mobile games are very cheap to create, with upfront costs that can be under USD 1 million, with engagement of hundreds of hours for a well-designed game. Although Netflix won’t explicitly be charging for games, Netflix’s subscription pricing power is tied to the engagement of its members in terms of time spent on Netflix, and mobile video games are a low-cost way for Netflix to increase engagement. The goal will be to provide delightful yet simple experiences that currently don’t exist on mobile today.

Netflix has previously licensed the rights to games based on its shows (including “Stranger Things”), but this new initiative is much larger in scope. The Los Gatos, California-based company has yet to settle on a game-development strategy. It’s important to consider that gamers don’t just play games, but 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. Through the Netflix app and recommendation algorithms, Netflix can distribute the games it produces to a captive audience that is already browsing on Netflix for entertainment.

MORE STREAMING SERVICES ARE FOCUSING ON SPORTS BETTING

Streaming services across the industry have started to add betting features alongside their sports feeds, offering a way to increase engagement and open a new revenue stream in the process. Apart from Disney or Netflix, DAZN, FuboTV, Sling, and others have either launched betting companion features or have expressed an interest in entering the space in the U.S. Any savvy sports service would recognize betting has been synonymous with matches for as long as anyone can remember, and there’s plenty of money to be made.

For instance, Dish partnered with DraftKings to bake DraftKings’ Sportsbook and fantasy contests into its Dish TV Hopper platform as an app integration. FuboTV launched its own proprietary sportsbook feature for betting in Iowa. Besides, in December 2021, its sports betting and iGaming arm, Fubo Gaming, has gone live in its second U.S. state with the launch of its mobile sportsbook in Arizona. Fubo Gaming has also obtained market access agreements in three other U.S. states, including Pennsylvania via The Cordish Companies, and Indiana and New Jersey via Caesars Entertainment. NBC Sports and Peacock partnered with PointsBet for their betting integrations. Meanwhile, sports streaming service DAZN plans “to be in the betting market directly where we can,” according to its chairman Kevin Mayer. The company believes that the addition of recreational betting to the DAZN platform across all its markets will create a safe, fun, and immersive experience for fans to enjoy alongside the top-tier sports they love.