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One might think that Netflix (NFLX -0.56%) should be ready to rest on its video content laurels by now. After dominating the video rental sector to smithereens, the company created the digital streaming business as we know it and continued to lead in the new industry, too. Netflix shifted gears in 2022, refocusing on profitable growth instead of maximum subscriber additions. The move scared investors away for a while, but the stock is sniffing at all-time high prices again. The profitable growth idea seems to work.
So it should double down on what the company does best and evolve into a slow-growing value stock. Right? After all, that's usually what happens in the final chapters of any market-moving growth story.
The company is juggling several potentially game-changing ideas nowadays. The ad-supported subscription plan turned out to be effective and profitable. Locally produced content drives robust growth in overseas territories, occasionally sparking global hits like the South Korean Squid Game and the Spanish Money Heist series. And I can't ignore the recent push into live content, led by partnerships with the NFL and the World Wrestling Entertainment (WWE) events promotion business, a unit of TKO Group.
All of these ideas should shove more value into the pockets of Netflix shareholders in the long run. However, I haven't mentioned the biggest game changer yet. In my view, Netflix's next big move will come when the company turns its free video games into a revenue-generating business.
The video-based media market is not a small pond. The top five companies in this sector generated $168 billion in revenue over the last four quarters. That includes $35 billion in Netflix's revenue streams.
Netflix is casting hungry eyes at the neighboring video game market, though. Entering the gaming industry in a big way could more than double the company's total addressable market size, based on a $250 billion Statista estimate for this year's video game revenues as a whole.
The company published its first five mobile games in November 2021. A handful of game studio buyouts followed, and Netflix's game library kept growing. Today, we're looking at roughly 100 mobile game titles, not counting 32 game-like experiences in Netflix's video-viewing platform.
The titles range from lightweight, kid-friendly fare like Teeter (Up) and Exploding Kittens to more serious names such as Into the Breach or Oxenfree. There are three older entries from Take-Two Interactive's Grand Theft Auto series of blockbusters. Netflix also provides a range of mobile games related to its own hit shows, including Stranger Things and The Queen's Gambit.
You could argue that Netflix has good reasons to spend time, money, and marketing efforts on a perpetually free game portfolio. The games could draw single-minded gamers into the movie-viewing fold. Existing film and TV enthusiasts may find another source of instant entertainment in Netflix's game list, arguably making them more engaged and loyal to the Netflix service.
Sure, that could happen. But the company explored a similar option 13 years ago, and took a very different path. A small but free selection of digital streams turned into the thriving video-streaming service you see today, despite loud protests when the company started asking for money.
You may remember it as the Qwikster crisis. Lots of DVD-mailer subscribers swore off the service in the face of higher prices for the new pair of services. Investors followed suit, taking the wind out of Netflix's market sails and sending the stock price 78% lower in five months.
As it turned out, Netflix had the right idea all along and optimists who bought more stock near the bottom of that plunge have been handsomely rewarded. One hundred dollars invested in Netflix at that low point would be worth $7,075 today.
So I won't be surprised if Netflix decides to copy the Qwikster event by breaking out its games as a separate subscription service. A deeply negative market reaction should be expected, followed by years of booming game service sales and a concurrent stock-price recovery. I'd be happy to chow down on popcorn while buying more Netflix stock in that dip.
"Building the games business is going to be for the next decade of growth. And we're two years in," Neumann said. "Our expectation and aspiration is to grow engagement by multiples of the current size over the next few years to bring bigger and bigger games to our service, more compelling games to our service."
That's a different approach. But a quick separation wouldn't be the first time a leading company changed its mind about a business strategy -- and I really do expect it. Is Netflix really planning to poke that giant bear without challenging it to a serious wrestling match?
You might see Netflix's video game operations as a user-charming side gig or as a potential revenue generator in their own right. Either way, I'm convinced that gaming will be a big deal for Netflix and its investors in the long run.
Anders Bylund has positions in Netflix. The Motley Fool has positions in and recommends Netflix and Take-Two Interactive Software. The Motley Fool recommends TKO Group Holdings. The Motley Fool has a disclosure policy.
The trough was short-lived. Investors that held on through the short decline (or purchased during the cheap months) are still riding the wave. Netflix stock price has not fallen lower than it did near the end of 2012.
Jonathan Friedland, the new vice president of global corporate communications who had joined Netflix just a few months earlier, asked whether customers on tight incomes might object to the price hike, according to people at Hastings' meeting. Hastings argued that Netflix was a great bargain. He said he knew that some customers would complain but that the number would be small and the anger would quickly fade.
Hastings was wrong. The price hike and the later, aborted attempt to spin off the company's DVD operations enraged Netflix customers. The company lost 800,000 subscribers, its stock price dropped 77 percent in four months, and management's reputation was battered. Hastings went from Fortune magazine's Businessperson of the Year to the target of Saturday Night Live satire.
To Hastings' credit, what he wanted to do made sense. The DVD's best days are behind it. Video streamed via the Internet is slowly replacing the physical disc, and betting a business on a dying product is never a great idea. So Hastings wanted to get ahead of the curve and focus on streaming, to disrupt his own business before someone else did it for him. It was aggressive, far-sighted, and very much in character.
Hastings is someone who knows a thing or two about disrupting businesses. Netflix, after all, is the company that drove the giants of video rental out of the sector with a simple premise: A simple-to-use Web site that delivers DVDs right to your doorstep. Best of all: No late fees. He became one of those executives with the "visionary" label, who can predict where a market is going before it happens, and was asked to join the board of directors of two of the most important companies in tech, Microsoft and Facebook.
Leading up to the first anniversary of the Netflix meltdown, CNET interviewed former and current Netflix employees to find out how a series of missteps turned into a lost year, and whether it has rebounded from those self-inflicted wounds. Most asked to remain anonymous. Netflix declined to comment for this story.
So how did Hastings stumble? Just prior to the attempt to remake Netflix into a streaming-video distributor, there was turmoil in the company's executive offices. Several of Hastings' most trusted lieutenants were no longer as influential with the CEO. Others had left and their replacements did not yet have the clout to convince Hastings he was being too aggressive for a customer base that by 2011 could hardly have been considered on the bleeding edge of consumer tech.
When customers and the press pushed back, the Netflix response was haphazard, culminating with an amateurish, confusing YouTube video heralding the coming of Qwikster, the spinoff that was supposed to be a life raft for Netflix's DVD operations. The Qwikster plan was scuttled three weeks after it was announced.
"Whatever happened to Fortune's Businessperson of the Year?" asks Wedbush research analyst Michael Pachter, referring to one of the many honors Hastings received in 2010. "Whatever happened to the guy who was invited to the boards at Facebook and Microsoft? What happened to that guy? Do you think Facebook would have invited him to their board now?"
Hastings has an unwavering belief that streaming video represented the future of home entertainment. He argued that in times of technological advancement companies that had succeeded at one business often clung too tightly to tradition and to what had made them successful. And then they were toast. He didn't want that to happen to Netflix. While few people disagree with that assessment, some within Netflix doubted Hastings' assessment of how quickly Netflix needed to shift to streaming.
But Hastings pressed ahead. Around March 2011, he took his plan to his executive team and then to the company's vice presidents. Some of the execs who heard Hastings talk about spinning off Netflix's DVD operations into a new company, referred to internally as DVD Co. and later Qwikster, left the meeting thinking Hastings was only considering the idea.
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