Keeping an eye on Epic Games’s lawsuit & XBox

parqor Netflix

At the end of the Netflix Q2 earnings call, Co-CEOs Reed Hastings and Ted Sarandos were asked:

So when you think about the interactivity of some of your shows makes them feel like video games. So when you think about the way the world is evolving, it just seems like these two sides of the world are starting to converge to some extent, both in terms of the kind of content as well as the experiences. So why not think about video games as an extension of where Netflix is today? If you could just help us think through that framework and how you consider that going forward.

Hastings and Sarandos each punted on the topic of Netflix‘s plans for video games, specifically, and Hastings left the door a little more wide open in a later interview with Variety, saying “someday [sports, video gaming, user-generated content] could make sense [on Netflix].” With Netflix offering both video streaming and downloads, it is not unimaginable that Netflix could expand into streaming games and game downloads. In turn, that would allow it to create an additional revenue stream from its existing user base of 150MM+ (à la the IAC MGM investment hypothesis).

So, with video games and streaming games both on Netflix’s radar, that means it is keeping a close eye on:

  1. the Epic Games lawsuit against Apple and its App Store (Netflix supports it), and
  2. Apple’s recent changes to its review guidelines for the App Store in response to that lawsuit and other developer complaints.

Apple’s App Store In-App Billing Will Be a Dealbreaker for Netflix

The challenge here is in-app billing. Netflix stopped offering in-app billing for subscriptions for new and returning customers on iOS back in 2018. With the new App Store guidelines is, any move by Netflix into streaming games would mean that it would have to return to paying 30% of in-app purchase revenues. If it offered a catalog app of games to stream, that app must “offer users the option to pay for a subscription with in-app purchase and use Sign in with Apple” and “all the games included in the catalog app must link to an individual App Store product page”.

So, a move into video gaming would require it to force new Netflix members to sign up via the App Store (only existing members prior to January 1, 2019 are allowed to use the App Store as a payment method). In turn that would create three buckets of consumers:

  1. Netflix customers paying via the App Store since before January 1, 2019 (70% of $853MM in iOS revenues in 2018)
  2. Netflix customers paying Netflix directly (100% of all new subscribers starting January 1, 2019)
  3. new Netflix customers who want to stream games and pay via the App Store (70% of all new revenues from streaming games [starting TBD])

This makes it no surprise why Netflix supports Epic Games seeking an alternative to the existing App Store 30% revenue sharing requirement: it is excessively complicated and expensive for Netflix to grow this new business in video games, and more broadly to diversify revenue streams an existing user base on its existing platform.

I would keep an eye on Netflix during the Epic lawsuit against Apple, they may not stay on the sidelines for long if they truly believe video games are a growth opportunity for them.

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