By Jon Swartz
Netflix Inc.’s its expansion into videogames offers a tantalizing upside for the streaming pioneer, but also sets up a potential confrontation with Apple Inc.
Netflix /zigman2/quotes/202353025/composite NFLX +3.06% executives confirmed Tuesday that the top streaming-video company is in the early stages of expanding into videogames. Netflix has experimented with the genre somewhat, including interactive television shows like “Black Mirror: Bandersnatch” and a “Stranger Things” mobile game, but hired a new executive last week to jumpstart the actual production of mobile games for Netflix’s app .
“We view gaming as another new content category for us, similar to our expansion into original films, animation and unscripted TV,” Netflix executives said in a letter to shareholders Tuesday. “Games will be included in members’ Netflix subscription at no additional cost similar to films and series.”
In a discussion related to its second-quarter earnings report Tuesday, executives including co-Chief Executive Reed Hastings described the effort as part of Netflix’s core efforts.
“We are a one-product company with a bunch of supporting services,” Netflix co-Chief Executive Reed Hastings said, specifically stating that videogames were part of the product, not a supporting service.
“We really see this as an extension of our core product offering,” Netflix Chief Operating Officer Greg Peters added. He characterized the gaming push as a multiyear effort that will start “relatively small” and “continuously improve, based on what members tell us is working.”
Netflix sees a chance to differentiate its gaming experience, Peters added, around its vast library of intellectual property and will focus on mobile devices and TV set-top boxes.
“There is a rich opportunity to improve quality-of-game experience,” one that lets fans of Netflix’s original content “go further and put their [gaming] energies there.”
Diversifying into games has seemed inevitable, given Netflix’s suddenly brutal streaming competition with media giants such as Walt Disney Co. /zigman2/quotes/203410047/composite DIS +1.37% , Apple Inc. /zigman2/quotes/202934861/composite AAPL +1.69% , AT&T Inc. /zigman2/quotes/203165245/composite T +0.19% , as well as slackening growth of new subscribers for Netflix, which missed second-quarter earnings estimates Tuesday and underwhelmed with its forecast.
Read more: Netflix says subscriber gains won’t bounce back as fast as Wall Street wants, stock falls
“We think mobile is a great platform — it is mature, with great tools, and a developer community,” Peters said during the 40-minute video call. “It checks all of those boxes.” Peters also indicated Netflix will license its gaming offerings.
Still, the move to create a new unit dedicated to making and distributing games, comes fraught with challenges. Chief among them: It could lead to a confrontation with Apple. Netflix could need approval from Apple to stream games in its mobile app on iPhones and iPads — Apple has required rivals like Microsoft Corp. Corp. /zigman2/quotes/207732364/composite MSFT +1.28% and Facebook Inc. /zigman2/quotes/205064656/composite FB -3.99% to have each game in a streaming platform approved individually.
In fact, a major component of Epic Games Inc.’s recent high-profile antitrust lawsuit against Apple is that the App Store has restrictions that aren’t tenable for some developers, creating a lopsided competitive landscape for Apple Arcade, a videogame subscription service available on iOS. Apple allows services that stream movies to offer them all in a single app, but forces services that stream games to separate each game for individual listing and review.
Read more: Apple vs. Epic: Why cloud gaming became a hot topic at landmark antitrust trial
“I can use Netflix with a native app and I can see lots of different movies or TV shows or whatever. Is it that you didn’t want to use a subscription model?” a confused Judge Yvonne Gonzalez Rogers asked at one point during the three-week Apple-Epic trial in May.
Executives from Microsoft and Nvidia Corp. /zigman2/quotes/200467500/composite NVDA +3.27% testified about the technological hoops they were made to jump through, at Apple’s request. Lori Wright, vice president of business development at Microsoft, said the software giant spent four months discussing with Apple how to launch its xCloud service as a native app, only to claim Apple demanded Microsoft, Nvidia and others list cloud games as separate apps.
Submitting Xbox games one-by-one was too onerous, Wright said, forcing Microsoft to resort to making a web app. This not only represented a technological hurdle for Microsoft, she said, but also inconvenienced consumers. Users aren’t used to installing apps from the web on their iPhones.