Netflix confirms gaming foray as Disney chips away its dominance

The cracks are showing in Netflix’s worldwide dominance. Netflix is still king of streaming video, but audiences are slowly shifting toward new rivals, namely the Walt Disney Company’s Disney+, according to research from Parrot Analytics. Netflix’s share of worldwide demand interest — a measure, created by Parrot, of the popularity of shows and a key barometer of how many new subscribers a streaming service is likely to attract — fell below 50 percent for the first time in the second quarter of the year.
 

The company, which hasn’t strayed far from its formula of television series and films,  said that it planned to jump into video games. It has hired a gaming executive, Mike Verdu, formerly of Electronic Arts and Facebook, to oversee its development of new games. 
 

The company called gaming a “new content category” that will be a “multiyear effort” and said it would be included as part of a subscribers’ existing plans at no extra cost. Games will first appear on its mobile app, an environment that already allows for interactivity. The vast majority of Netflix’s customers watch on big-screen televisions. Gaming isn’t meant to be a stand-alone or a separate element within Netflix. “Think of it as making the core service better,” Hastings said. “Really, we’re a one-product company with a bunch of supporting elements.” 
 

Netflix’s “lack of new hit original programming and the increased competition from other streamers is going to ultimately have a negative impact on subscriber growth and retention,” Parrot said in a news release before Netflix announced its quarterly earnings on Tuesday. Netflix said it had attracted 1.5 million new subscribers in the second quarter of the year, beating the low bar it had set when it told Wall Street that it anticipated adding just one million.

The company said it expected to add about 3.5 million new subscribers in the third quarter, lower than the approximately 5.5 million that investors were expecting. Netflix shares fell as much as 4 per cent in after-hours trading on Tuesday before bouncing back a little. The company now has 209 million subscribers, but it lost 430,000 in the US and Canada, its most lucrative region, over the period. It now has 73.9 million subscribers in that market, with about 66 million in the US.
 

In a letter to shareholders, Netflix said that “Covid-related production delays in 2020 have led to a lighter first-half-of-2021 slate.” Netflix relies on creating as many different shows and films for as many different audiences as possible, and the pandemic upset that formula, forcing the shutdown of productions around the world.

Traditional media players have started to consolidate, again, potentially setting off another race for talent, studio space and production resources. In May, Discovery announced that it would buy WarnerMedia from AT&T, creating the second-largest media giant, behind Disney and ahead of Netflix. Less than two weeks later, Amazon announced that it would buy Metro-Goldwyn-Mayer, home to the James Bond franchise, for $8.45 billion, a price many analysts considered rich.
 

In the earnings call after the report, Reed Hastings, Netflix’s co-chief executive, said he didn’t think it made sense for Netflix to jump into the consolidation game. He even offered his own analysis of some of the industry’s biggest deals, including Disney’s acquisition of the bulk of Rupert Murdoch’s 21st Century Fox.
 

“Certainly Disney buying Fox helps Disney become more of a general entertainment service rather than just a kids and family,” he said. “Time Warner-Discovery — if that goes through — that helps some, but it’s not as significant, I would say, as Disney-Fox.” Hastings’s co-chief executive, Ted Sarandos, offered a sharper critique of these megadeals. “When are they one and one equals three? Or one and one equals four?” he asked. “Versus what most of them tend to be, which is one and one equals two.” 

Disney+ more than doubled its share of demand interest in the second quarter compared with a year earlier, and Amazon Prime Video, AppleTV+ and HBO Max are also gaining, according to Parrot. In its letter to shareholders, Netflix said the industry overall was “still very much in the early days” of the transition from traditional pay television to streaming. “We are confident that we have a long runway for growth,” it said. “As we improve our service, our goal is to continue to increase our share of screen time in the US and around the world.”