Big Netflix Drop a Warning for Game Cos?

Time for ad supported price optionality?

Time for ad supported price optionality?

Sometime around 2009, I emailed Reed Hastings to pitch him the notion that Netflix needed to add an ad-supported tier instead of relying solely on paid subscribers, which I felt my company at the time could provide through our innovative BrandBoost™ value-exchange ad platform. Reed was kind enough to promptly reply to me with a note saying, in effect, “Thanks, but Netflix will never have an ad supported model.”

Flash forward to January 2022 and the recent slowdown in Netflix subscriber growth, which has tanked the company’s share price after earnings. That is a direct result of consumer price sensitivity. To paraphrase Needham & Company’s excellent media analyst Laura Martin on CNBC, every time Netflix raises its price, it reduces its total addressable market, especially when all of its competitors provide the option of ad-supported tiers. When the CNBC interviewer pushed her on the notion that Netflix users prefer “ad-free,” her immediate response was: “Yeah, the rich ones.” 

While it may have taken over a decade, and the rise of lower-priced and even free ad-supported video competitors, Netflix’s day of reckoning should be a huge wake-up call for video game publishers and cloud game services. For over 20 years, I’ve heard from all ranks of game developers and publishing executives that their players hate ads. Much like Reed Hastings in 2009, several have bluntly told me, “We will never put ads in our games.”

Amazingly, traditional video gaming business models have largely been built on the concept of extracting as much revenue as humanly possible from a fraction of the player base -- the ones willing to pony up for season passes, digital currency, items and boosts that are the hallmark of the “live service” economies of the biggest and best games. The most successful free-to-play (F2P) game of all time, Fortnite, converted just 22% of its monthly active players into spenders in 2018, a number that is likely below 10% today. EA’s FIFA, meanwhile, recently reported that it monetizes 20% (i.e., eight out of ten) of its players in the post-purchase “live service area.” Outside a handful of top games, most AAA titles probably convert 5% or less of their players to spenders. In the mobile games sphere, which is inherently more global and spread across a less wealthy player base than console owners in North America and Western Europe, the ratio is less than 2%.

Game company executives have long held up Netflix as their shining North Star. “See,” they say, “we don’t need an ad supported model, just look at Netflix.” This is a surprising and unscientific response from an industry that is built on rigorous analytics and data-based decision making. The fact of the matter is that players are not only cool with an ad-supported model, but most gamers (77% in our own Reddit surveys), say it is something that they would greatly appreciate. 

For a portion of society that has the financial wherewithal, like Netflix subscribers, paying full boat is fine. But the vast majority of gamers are already voting with their wallets, given the low- spending percentages. They want and need optionality on price and access to all that exciting new game content. 

This coming spending dilemma in the video game industry is only going to get more acute as cloud gaming takes over as the key access point content. Microsoft has been building up its first-party content library for Xbox Game Pass, most notably with their move to acquire Activision Blizzard. Given their other big recent purchase, advertising platform Xandr from AT&T, one could rightly assume that Microsoft sees a path to an expanded TAM (total addressable market) by removing price as a barrier to entry. So yes, expect free access to XBox Game Pass down the road, courtesy of brand sponsors, a.k.a. advertisers. There are a lot of smart people in Redmond, Washington and certainly they can see that Spotify, Hulu and other cloud content services derive around 70% of their users and a big chunk of their payers via offering a free tier.

But what players do not want is a bad ad experience. That certainly won’t fly with perhaps the most vocal and socially connected group of consumers ever. They already feel -- and loudly communicate on Discord, Reddit, Twitter, etc. -- that game companies are sometimes over-monetizing their games. To get this right, video game companies will need to get comfortable with the notion of ads and thus putting their players in control to decide when and how to engage with brands --with full transparency around the value exchange taking place. Gamers today understand that their time and attention is valuable to marketers, and they want equal footing in such a relationship. 

Had Reed Hastings and Netflix realized that a one-size-fits-all approach to their consumers' price sensitivity was miscalculated, the door might not have opened so wide to ad-supported competitors like HBO Max, Peacock and Paramount+ to slide right in. The game companies that provide economic optionality for their players will also reap the benefits of an expanded total addressable market and build much healthier game economies that scale from offering all players types of payment, including advertising engagement, that they can get behind. The ones that don’t heed their own player feedback and desires might end up as forgotten as Qwikster.

I’d love to hear your thoughts. Leave me a comment at davemadden.substack.com.

Want to learn more? Find out how PlayerWON™ enhances the experience for F2P console and PC gamers while driving lifetime value and in-game spending for publishers.