Netflix, Inc. NFLX confirmed to Bloomberg on Wednesday that it intends to expand its content offerings to include video games in the next year.
Those who have closely watched Netflix might recall the company stating in 2019 that video games are a primary alternative that potential customers may choose over the streaming service.
Related Link: What This Analyst Thinks About Netflix's Potential Gaming Expansion
Why It Matters: Bloomberg reported that Netflix tapped former Facebook, Inc FB AR/VR and Electronic Arts, Inc. EA executive Mike Verdu to direct its video game efforts.
This marks an official strategic expansion into the industry following the release of its first mobile game in 2019, which was based on its award-winning series "Stranger Things."
This expansion adds over $200 billion to the streaming giant's current $400-billion total addressable market, Morgan Stanley analyst Benjamin Swinburne said in a Friday note.
Additionally, investors so far have been hesitant to price in the expansion opportunity, as shares are trading at the same levels as prior to the news, said the analyst.
Morgan Stanley reiterated an Overweight rating on Netflix with a $650 price target.
What's Ahead: Netflix is not the first non-gaming-focused big-tech company to attempt an entry into the video game development industry, Swinburne said.
The company's FAANG peers have all attempted to make advances in the space, though execution has been severely underwhelming, said the analyst.
Two key barriers to entry shield existing players from big-tech threats, he said: game development is resource-intensive, and new gaming platforms require consumers to take on high switching costs.
Related Link: Netflix Pulls Back, But Could Fly Into Earnings
Amazon, Inc. AMZN and Alphabet, Inc. GOOGL GOOG both invested time and recruited high-profile talent to lead video game development and have been unable to launch a successful product, Swinburne said.
Microsoft Corp MSFT also attempted to develop video games through its Xbox business line but ultimately shifted to an M&A strategy that has proven successful, said Swinburne.
From a customer perspective, switching from an existing gaming platform to Netflix will come with the cost of losing friend lists, account profiles and achievements and previously purchased games, said the Morgan Stanley analyst. If Netflix were to drive customers to its distribution platform, the company's game portfolio would require highly "competitive technology and exclusive content," he said.
Despite these challenges, Netflix seems confident in its abilities, and management will be able to use its competitors' failures to guide its future in the game development industry, according to Morgan Stanley.
NFLX Price Action: Netflix was down 2.59% to $528.91 at last check Friday.
Related Link: How To Buy Netflix (NFLX) Stock
Photo: courtesy of Netflix.
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