As Domestic Growth Stalls, Netflix Plots Video Game Expansion

Three months ago, Netflix warned investors that its subscriber numbers would be less than rosy throughout the first half of 2021 after Covid-19 shutdowns delayed the rollout of many of the service’s most anticipated titles until the second half of the year. On Tuesday, the streaming giant had slightly better news to report: it had added 1.5 million new subscribers in the quarter (brings it to 209 million globally), more than the 1 million it had projected a quarter ago. But most of that growth came from the Asia-Pacific region, and the company lost around 430,000 U.S. and Canada subscribers (falling to 73.95 million), as a lackluster programming slate combined with unusually strong growth during the earliest days of the pandemic continued to cast a pall on the company’s results. “Covid has created some lumpiness in our membership growth (higher growth in 2020, slower growth this year), which is working its way through,” the company wrote in a letter to shareholders Tuesday, in which it said its large membership base in the U.S. and Canada coupled with a seasonally weak quarter for acquiring new subscribers was the reason for the decline in the region. Netflix’s 1.5 million global net additions is a little more than one-sixth of the more than 10 million subscribers the company added in the second quarter one year ago, reflecting just how lumpy that "lumpiness" has been over the past year. The domestic subscriber loss is also the first time since the second quarter of 2019 that Netflix has lost subscribers in the region, marking a rare miss for the streamer. (The company was keen on pointing out that since that subscriber drop two years ago, Netflix has been able to add nearly 7.5 million paid subscribers in the U.S. and Canada.) Netflix’s Global Content Ambitions Look a Lot Like Lupin Gaming the system Netflix is projecting an uptick in subscribers in the third quarter of the year to 3.5 million subscribers, but as subscriber growth continues to tail off, the company is eyeing other ways to keep subscribers engaged and paying every month. The streamer confirmed in its shareholder letter that it was in the “early stages” of a larger expansion into games, building on its success with interactive show Black Mirror Bandersnatch and its Stranger Things game series, based on the hit show. Those efforts will initially center on mobile games, but may expand as the company learns more from early experiments. “We view gaming as another new content category for us, similar to our expansion into original films, animation and unscripted TV,” the company wrote in its letter. “Games will be included in members’ Netflix subscription at no additional cost, similar to films and series ... Since we are nearly a decade into our push for original programming, we think the time is right to learn more about how our members value games.” In an investor video interview Tuesday, chief product officer and chief operating officer Greg Peters said that the gaming expansion would be focused on delivering an experience that will be different from most of the other mobile games on the market. In other words, it won't have in-game ads, won't have in-game purchases or focused on per-title purchases. "We really see this as an extension of the core entertainment offering that we've been focused on for the last 20 years," Peters said. "We're going to start relatively small, we'll learn, we'll grow, we'll refocus our investment based on what we see is working." Netflix will focus first on building out games tied to the show's own IP, and will try out a variety of game formats at the outset. But the service isn't against testing out standalone games and stories. "Maybe someday, we'll see a game that that spawns a film or series," Peters said. "That would be an amazing place to get to." The branching out into games comes as Netflix continues to acknowledge that while it dominates streaming television, there are plenty of competitors when it comes to capturing consumers’ attention. Netflix counts gaming companies and social platforms—including Fortnite developer Epic Games, YouTube and TikTok—among its biggest competitors for screen time, and per Nielsen’s new monthly snapshot of TV time, which Netflix shared with shareholders, the company has potential to capture many more eyeballs. Streaming represents less than a third of U.S. TV screen time, according to Nielsen's new Gauge metric; among that, Netflix accounts for just 7% of total TV time. (Cable and broadcast make up the bulk of total time spent, at 40% and 23% respectively, according to Nielsen.) No merger plans In the race to find growth, Netflix isn’t ruling out acquisitions, but the company said that there is nothing on the market that is a crucial buy. “While we are continually evaluating opportunities, we don’t view any assets as “must-have” and we haven’t yet found any large-scale ones to be sufficiently compelling to act upon,” the shareholder’s letter read. Netflix also brushed off the planned combinations of WarnerMedia and Discovery and the recent Amazon acquisition of MGM. “The industry has consolidated materially over the years (Time Warner/AT&T,Viacom/CBS, Discovery/Scripps, Disney/Fox, Comcast/NBCU/Sky, etc.) and we don’t believe this consolidation has affected our growth much, if at all,” Netflix wrote. As is typical every quarter, Netflix shared a peek behind the curtain at some of the best-performing programs in the quarter on the service. Fantasy series Shadow and Bone, based on the Grishaverse book series of the same name, attracted 55 million member households in its first four weeks on the service, while Sweet Tooth, based on the DC Comic, attracted 60 million viewers in the same time period. Netflix’s reality programming also has performed well among a certain smaller audience subset: the second season of dating competition series Too Hot to Handle and the social experiment show The Circle, both of which were released on Wednesdays in batches, attracted an estimated 29 million and 14 million household viewers in four weeks, respectively. Part Two of Lupin, a French show that the company has invested in making an international hit, attracted 54 million member households in four weeks. Among movies, Zach Snyder zombie film Army of the Dead attracted 75 million member households in its first 28 days, while Kevin Hart-led Fatherhood attracted 74 million member households in the same timeframe. (Netflix measures a view as an account that watches just two minutes of a show or movie.) As Netflix detailed last quarter, big titles are coming in the second half of the year, which the company hopes will help shore up its slumping subscriber numbers. Some of those titles include the returning seasons of Never Have I Ever, which is already among Netflix’s Top 10 most popular shows since being released on July 15. La Casa de Papel/Money Heist, Sex Education and a new installment of the teen romance series Kissing Booth are also soon to arrive. As long as production continues to run smoothly, that pipeline will continue to deliver titles Netflix hopes will woo subscribers once again. “Covid and its variants make predicting the future hard, but with productions largely running smoothly so far, we’re optimistic in our ability to deliver a strong second half slate,” Netflix said.