Alphabet and Netflix are making a key mistake. Will their actions suffer?

It is not often that Alphabet (GOOGLE -5.41%) (GOOG -5.44%) Y Netflix (NFLX -4.57%) they are compared in the same industries, but the recent activities of both companies in the game could see them compete directly soon.

Sure, gaming can be incredibly lucrative; however, Alphabet and Netflix have taken the wrong approach to entering this highly competitive industry, and it could negatively affect each of their stocks.

a rocky adventure

Alphabet launched its cloud gaming service, Google Stadia, in November 2019, and in February 2021 decided to downscale the platform after less than two years due to dismal growth. Now, Netflix appears poised to follow Alphabet’s path into gaming by similarly pursuing cloud gaming, a largely underperforming technology.

Cloud gaming is a feature that allows consumers to stream games directly to any device, such as a laptop, computer, smartphone, or tablet. The selling point is that users don’t need to shell out hundreds of dollars for a game console to enjoy popular titles as they can stream them, eliminating the need for expensive hardware.

The reasoning sounds promising; however, the reality is that very few consumers interested in playing console-style games are also unwilling to purchase a game console. The result creates a small market of people willing to subscribe exclusively to a cloud gaming service, mainly because cloud gaming isn’t as reliable as playing downloaded games on a console or PC.

Google Stadia experienced this reality firsthand, with the much lower player count it received across major games compared to consoles like Microsoft‘s (MSFT -3.86%) xbox and Sony‘s (SONY -4.16%) Play station. Just as an example, on February 1st, the immensely popular free game fate 2 got 5,390 players on Google Stadia, while Xbox got 275,000, PlayStation got 355,000 and ValveSteam reached 224.00.

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The number of players in February had actually decreased since March 2020, when fate 2 players on Google Stadia averaged around 5,500 per day. And Google Stadia’s attempt to persuade gamers in 2020 by offering a free trial of the service proved unsuccessful as fate 2 players did not exceed 36,000 before immediately beginning to decline again.

As a result, Alphabet decided to downsize Google Stadia after less than two years of service and shut down its game development studio, Stadia Games and Entertainment. The cloud gaming platform continues to offer third-party games, but it no longer has plans to develop exclusive titles in-house, which are key to attracting new players. Alphabet is also boosting its gaming efforts by offering its Stadia technology directly to developers who could benefit from using Google’s software rather than creating their own cloud gaming service.

Netflix takes a risk

Netflix Games launched in November 2021 as an addition to the Netflix video streaming service, offering a variety of free mobile games for subscribers. The company’s foray into gaming sees it trying to diversify its services and add value to a Netflix subscription. However, the company has struggled to attract gamers, with a study by Apptopia revealing in early August that less than 1% of subscribers engage with Netflix Games.

More recently, Netflix began seeking cloud gaming specialists across multiple job postings, stating in one of the listings that the position “will support our cloud gaming service.” the company is looking to branch out into more extensive console-style games.

Netflix arguably has a better chance of succeeding in cloud gaming than Alphabet, considering it would be an additional feature of its streaming platform, not the entire service. Subscribers would pay for access to the company’s popular movie and television library, with games as a bonus. However, the company will continue to fight an uphill battle against gaming giants Microsoft and Sony, each of which has its own comprehensive gaming subscription, to make its investment worthwhile.

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If Netflix can’t attract more gamers soon, the company could pour millions into a company that never gets off the ground.

Is it time to sell Alphabet and Netflix?

Despite the precarious gaming ventures of Alphabet and Netflix, each company remains a buy, considering the success of other aspects of their businesses. For example, Alphabet’s advertising business is booming, generating $56.3 billion in its second quarter, an increase of 11.6% year over year. Meanwhile, Netflix shares have been on the rise since it posted better-than-expected Q2 2022 subscriber numbers, as well as a projection that the platform would hit an all-time high of 221 million members in Q3 2022. .

Investors should remain bullish on each of these stocks, but should also be cautious about their cloud gaming activities. Alphabet has cleverly turned Google Stadia into more secure initiatives, but Netflix is ​​just getting started. There is a possibility that Netflix could invest billions of dollars in its games division only to attract a meager return on its investment. His next steps in this area deserve to be watched.

Suzanne Frey, an Alphabet executive, is a member of The Motley Fool’s board of directors. Dani Cook has no position in any of the stocks mentioned. The Motley Fool holds positions and recommends Alphabet (A shares), Alphabet (C shares), Microsoft and Netflix. The Motley Fool has a disclosure policy.

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