Netflix’s cloud gaming service faces a tough road

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Netflix (NFLX) is joining a growing number of video game and tech giants attempting to get a foothold in the still-nascent cloud gaming business. It won’t be easy.

The video streamer announced its gaming ambitions last week, saying that it will offer customers in Canada and the UK beta access to the service on select TVs and computers.

Gaming has traditionally had a high barrier to entry, with players often needing (or wanting) expensive consoles or computers with powerful graphics processing for the desired experience.

Cloud gaming, on the other hand, allows players to use their own underpowered devices like smartphones, tablets, TVs, or cheaper computers to stream games using a gaming company’s powerful servers.

But Netflix is embarking on the difficult task of winning over gamers in a market even the likes of Google (GOOG, GOOGL) couldn’t break into. The company closed its Stadia game streaming platform in 2022 due to a lack of users.

“You're going up against an entrenched consumer behavior around gaming,” explained IDC research director Lewis Ward. “And if you don't hit all of their checkboxes for what's necessary to make a good gaming experience, you will fail.”

Cloud gaming is still in its early days

The idea of cloud gaming isn’t new. Companies like OnLive and Gaikai tried their hands at the concept in the late 2000s, but the technology never caught on. Sony (SONY) eventually acquired portions of those businesses for its own platform. But with cloud infrastructure and high-speed internet now standard in many parts of the world, game streaming is a far more realistic option for gamers.

Cloud gaming may be far from a mature industry, but Netflix will face stiff competition from the big-name incumbents.

According to documents released as part of the UK’s Competition and Markets Authority’s investigation into Microsoft’s (MSFT) acquisition of Activision Blizzard (ATVI), the Xbox maker controlled 50% to 60% of the global cloud gaming market monthly active users in 2022. Nvidia held between 20% and 30% of the market, while Sony captured 10% to 20%. Amazon’s Luna had 0% to 5%.

Netflix seems to have learned from Google’s mistakes. Typically, platforms charge a flat monthly fee for access to a vast library of games, but Google’s Stadia had users bring their own games that they purchased separately to the platform, which only offered a few free-to-play games. Few people signed up.

Netflix isn’t kicking off its streaming beta with a ton of games — just two: “Oxenfree” and “Molehew’s Mining Adventure” — but, according to Ward, that’s a wise move for the company.

“From my perspective, it seems to be that they are choosing the simplest kind of scenario to vet their cloud stream gaming hardware and software and user experience efforts,” Ward said.

“Because once you start getting into multiplayer, you open up a whole other can of worms around how the network is structured, and how the game works and how it relates to networks outside of Netflix.”

You can’t rule out Netflix

Netflix might be staring down entering a difficult, crowded market, but it’s hard to write off the company right out of the gate. Especially when you look at all that it’s overcome in the past.

“We've learned over the last decade or so that it's a mistake to underestimate Netflix,” Wedbush managing director Michael Patcher told Yahoo Finance.

“A decade ago, they'd never produced a television show. I think I and everybody else thought they would never succeed in creating original content that had staying power, and they've done pretty well,” he added.

Netflix's biggest test will come when it eventually announces pricing for its gaming effort. If the service is built into your existing monthly Netflix subscription, it could be a smart way of ensuring that users who finish the latest season of their favorite show will stick around rather than canceling their subscriptions until the next season. It’s a precedent similar to Amazon’s Prime Video.

For now, though, the company simply has to ensure that its beta actually works well enough to keep people playing. And that’s not exactly an easy feat. Then again, neither was streaming movies.

Daniel Howley is the tech editor at Yahoo Finance. Follow him @DanielHowley.

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