Netflix’s Videogame Gambit Is Taking Shape as Streaming Competition Grows

The move speaks to Netflix’s desire to attract new customers and keep users on its platform for longer periods, and it comes as the company is facing its first serious challenges to its streaming business. New entrants, including

Walt Disney Co.

DIS 0.24%

’s Disney+ and WarnerMedia’s HBO Max, are making inroads, and deep-pocketed rivals such as

Apple Inc.

AAPL -0.66%

and

Amazon.com Inc.

AMZN -1.46%

are spending aggressively on content as well.

Netflix is still the dominant streaming service with more than 200 million subscribers world-wide, but its growth has slowed this year as pandemic-related shutdowns end. Investors have been watching closely to see if Netflix will diversify its revenue sources beyond subscriptions to support its increasing content budget.

Videogames could be a lucrative solution. Global consumer spending on game software is projected to reach $175.8 billion this year and exceed $200 billion by 2023, according to Newzoo BV. Mobile games—the kind Netflix is expected to focus on—are on track to make up roughly half of this year’s haul.

Success is far from guaranteed, analysts say, as larger incumbents have at times struggled in mobile gaming and it can be a challenge finding the right content that lends itself to becoming a videogame.

Netflix’s videogaming strategy is still a work in progress, according to people familiar with the company’s thinking. The immediate focus will be on making mobile games, these people said, and they won’t include advertising, as is the case with Netflix’s entertainment operations.

Netflix is planning to make the videogames available to play in its app without an additional fee, one of the people said. The company didn’t comment on whether users would also be able to download those games.

“They’ll probably lower their churn,” said Benchmark analyst Mike Hickey. “You can burn through a TV series in a day, but you can constantly engage with a game for months to years.”

The company this week said it hired

Facebook Inc.

FB -0.87%

executive

Mike Verdu

as vice president of game development. Mr. Verdu joined Facebook in May 2019 and was responsible for bringing games and other content to the company’s Oculus-branded virtual-reality headsets.

Bloomberg first reported the hire of Mr. Verdu, who has also worked at

Electronic Arts Inc.

EA -0.08%

and

Zynga Inc.

ZNGA -2.14%

At Netflix, Mr. Verdu will work alongside other executives with game-industry experience, such as board member

Ann Mather,

who spent more than 15 years as a director for “Kim Kardashian: Hollywood” maker Glu Mobile, a company recently acquired by Electronic Arts.

Jessica Neal,

before being named Netflix’s talent chief in 2017, worked as chief people officer at mobile gaming company Scopely Inc. And Netflix finance chief

Spencer Neumann,

who joined the company in 2019, was poached from

Activision Blizzard Inc.,

ATVI -1.72%

one of the world’s largest videogame companies. Activision Blizzard is suing Netflix over the matter. Netflix declined to comment on the lawsuit Thursday.

Netflix has increasingly signaled interest in the videogame industry. The company’s recent deals with creative talent including “Bridgerton’’ producer Shonda Rhimes feature language regarding the creation of videogames based on content.

In April, Chief Operating Officer

Greg Peters

said games are “going to be an important part” of the Netflix experience going forward. “We’re trying to figure out what are all these different ways that we can increase those points of connection, we can deepen that fandom,” he said on an earnings conference call.

Netflix has had modest success in mobile gaming through a licensing deal with the Texas studio BonusXP Inc. Its $4.99 title, “Stranger Things 3: The Game,” is based on a popular Netflix property and has amassed about $315,000 in consumer spending in Apple’s and Google’s app stores since launching in August 2019, data from Sensor Tower Inc. show.

That game, however, isn’t streamed online or housed within Netflix’s mobile app. It is available for download only. For Netflix to stream multiple games from inside its mobile app on iPhones and iPads, it would need approval from App Store operator Apple, which has previously rejected efforts by

Microsoft Corp.

MSFT -0.73%

and Facebook to go down the same path.

Mobile games are typically less costly and complex to develop than console and computer games. They also tend to be slower paced, making them easier to stream over the internet without delays. As their name implies, they are designed for playing on the go, as opposed to over a TV screen, though that appears poised to change. Microsoft recently said it is working with TV manufacturers to bake its Xbox Game Pass service into sets, which would enable users to stream games without a console.

The market is competitive, however, and even large industry players such as Electronic Arts,

Take-Two Interactive Software Inc.

TTWO -2.26%

and Ubisoft Entertainment SA have all struggled to stand out.

Other major movie and TV-show makers have tried breaking into videogame development, but those efforts didn’t last. Disney abandoned its game studios a few years ago, as did Viacom more than a decade ago.

More recently tech giants such as Microsoft, Google, Facebook and Amazon have launched services that support the streaming of videogames over the internet.

The top 100 grossing mobile games in the U.S. last year made up more than half, or roughly 64%, of all player spending on such titles, according to Sensor Tower. Ten were based on TV shows or movies, an indication that the genre is popular. Netflix could lean on more of its own properties to develop games, but some analysts say it has few that would lend themselves to interactive experiences.

“Do you want to play ‘Bridgerton’ the game?” said Wedbush Securities analyst Michael Pachter, a longtime critic of Netflix. “They’re going to fail miserably.”

Mr. Pachter said his bearish stance also speaks to difficulties he expects Netflix to face in convincing people to play games through its TV app, where most users go to watch its selection of movies and shows. Consumers will need a game controller that can interact with all the major TV brands and connect to the internet, he said.

Still, there are potential upsides for Netflix moving deeper into videogames. Striking deals for games with third parties—similar to its plan with “Stranger Things”—would put less financial pressure on Netflix to quickly bulk up its library with original content, according to Mr. Hickey. “The biggest cost to game development is head count,” he said.

Write to Sarah E. Needleman at [email protected] and Joe Flint at [email protected]