Netflix and Microsoft show that video gaming has become too big for tech giants to ignore

The business of video games is having a moment.

Less than two weeks after Take-Two announced its $12.7 billion for Zynga, and just days after Microsoft announced its record-breaking $69 billion acquisition of Activision Blizzard, Netflix co-founder and co-chief executive officer Reed Hastings said Thursday that building out video gaming to where Netflix can "amaze our members by having the absolute best in the category" is his goal.

"We have to be differentially great at it," Hastings said during Netflix's earnings conference call. "When mobile gaming is world leading, and we're some of the best producers, like where we are in film today, having two of the top ten, then you should ask what's next. Let's nail the thing and not just be in it for the sake of being in it."

That's a tall task for Netflix, which is building its gaming unit from scratch. Netflix chief operating officer Greg Peters said Thursday the company plans to license "large game" intellectual property that "people will recognize" later this year. Hastings added Netflix will use its "walk, crawl, run" strategy around gaming, where it purposefully grows the business gradually to learn about user habits and use resources efficiently.

Netflix, of course, has used this general strategy before — in streaming video. The company licensed well-known movies and TV shows to build out its user base as a cable TV supplement before slowly wading into original content. After years of experimenting on a show-by-show or film-by-film basis, Netflix felt its recommendation algorithm and user data could accurately predict new popular original content. Today, Netflix spends billions of dollars each year on originals.

The Microsoft acquisition and the Netflix commentary is a general acknowledgment that gaming has become an important part of global entertainment, especially with young audiences. Netflix has often pointed out that gaming, such as Fortnite, competes with its core streaming service for eyeballs.

This isn't new, exactly. Microsoft has owned Xbox for decades. But it's obviously never spent nearly $70 billion to acquire anything, let alone a video game company.

Gaming has jumped to the forefront of many people's attention as companies like Meta and Roblox build strategies around a vaguely defined immersive consumer computing strategy called the "metaverse," which will almost certainly involve gaming at some level.

But the acquisition rush likely suggests something far simpler: Gaming has become ubiquitous. Mobile devices and online play, connecting people to play real-time games, has given gaming a wider audience and significance in youth culture. The Entertainment Software Association, the U.S. video game's trade association, claims more people play video games than ever before.

Big tech and media companies have flirted with gaming in the past, with mixed success. Disney and Google are among the large companies who decided to abandon their video game aspirations in recent years. And it's probably far too early to position a company for the metaverse, when it's still entirely unclear what the metaverse encompasses.

But gaming is clearly a major interest two of the world's largest tech companies. That's meaningful, and it probably means there's more large gaming consolidation to come.

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