Netflix should acquire Nintendo!

Some fanciful thinking to solve a content shortage & content unlock

If you have followed my Substack since it stated, you will have read my thoughts on Nintendo and Netflix. It occurred to me that Nintendo’s IP could be the answer to Netflix’s content and gaming needs, keeping them ahead of the encroaching competition. 

As Matthew Ball points out in his analysis on Netflix. -

The majority of film/TV/book IP is owned by Netflix’s video competitors (e.g. Disney, Warner Bros, Paramount), and therefore inaccessible to Netflix.

Netflix face the ongoing challenge of paying over-the-odds to acquire new content, ahead of competitors. 

Disney’s entertainment flywheel means they can capture new subscribers at several touch points; cinema, theme parks & merchandise. Netflix, on the other hand, is limited to their streaming service. Once content is past its peak, it begins collecting dust in their back catalogue.

How can Netflix compete with the greatest IP library in the world? How about by purchasing the second. 

Instant IP in the content arms race 

Mario, Pikachu and Link are three of the most recognisable fictional characters on the planet. Other Nintendo stalwarts include Donkey Kong, Kirby and Samus. How many universes can be built from Nintendo IP? 

Chris Pratt will star as Mario in Nintendo’s first foray into cinema in 30 years (excluding the Pokémon franchise). Nintendo have been petrified since the disastrous reception of the Mario Bros release in 1993. 

How much content could be created with Netflix’s $17 billion dollar content budget? The Netflix studios are the best at what they do. In 2021 they were the most Emmy and Oscar winning studio for Netflix Originals. They are perfectly positioned to help supercharge Nintendo IP. 

A Netflix and Nintendo merger would allow both companies to maximise engagement on two fronts, 222 million Netflix subscribers and 32 million Nintendo Switch Online (NSO) accounts. 

Nintendo essentially owns all of the Pokémon IP, every name, logo and character. Pokémon is one of the largest gaming franchises of all time. It’s estimated that Pokémon licensing alone brings in around $5 billion dollars per year. Pokémon Go’s 80 million monthly active users would offer further advantages - despite not being technically owned by Nintendo. Niantic are the developers and publishers behind it.

With Pokemon’s IP, Netflix would have the opportunity to create several Marvel style universes.   

Merchandising & User Engagement  

Once content moves into Netflix’s back catalogue, it’s almost impossible to monetise further. It reduces Netflix’s future spend on content, but does little more. Nintendo's licensing and merchandising allows them to keep their products front-of-mind with fans. Mario Kart launched in 1992, 30 years later Mario Kart 8 is one of the best selling games of all time. Super Nintendo World opened March 2021 at Universal Studios Japan, with future openings under construction in Hollywood, Singapore and Orlando.   

Nintendo are already plugging their IP into theme parks. Stranger Things was featured at the the Universal Halloween Horror night and it’s reported that Squid Game Land has been called for by fans. Nintendo’s existing relationships with Universal could make a Netflix/Nintendo Land instantly feasible. 

Combination of Gaming Platforms 

In November 2021 it was announced that Netflix would launch Netflix Games. Five iOS games were made available to all subscribers for no additional cost.

Netflix is in a war for attention. It’s estimated that the average American watches 5.5 hours of TV, whilst the average gamer plays 2.5 hours (and growing). Every generation plays more than the one that preceded it. Netflix is no longer just fighting other SVOD services.

However, Netflix does not possess the technology or expertise to compete effectively in the gaming sector. Nintendo’s technology instantly solves this issue. Their platform acts as an out the box solution. They provide the hardware and software, plus 32 million NSO subscribers.  

Netflix are a decade late to the party, Xbox and Playstation have an almost insurmountable advantage. In comparison to the competition, Netflix's gaming IP and technology are non-existent. It's unlikely they will pursue the iOS and Google Play stores indefinitely, due to high in-game commission fees. The NSO store would allow Netflix to circumnavigate app store commissions. 

If Netflix hopes to compete on the gaming world stage, it’s unlikely they will be able to take on the likes of Xbox and Playstation, without enormous outlays. Netflix spends more more than 40% of revenue on content. Gaming studios can be massively profitable. Nintendo generates an operating margin of 35%. A hypothetical partnership could drive margin for both companies.

Unlike other gaming studios, Nintendo produce their own hardware. They have shipped over 100 million Switch consoles since launch in 2017.

Netflix is not officially available on the Nintendo app store. A merger would allow access to 100 million handsets and could capture tens of millions of new subscribers. 

Having captured the majority of their target market in the US, Netflix’s acquisition strategy is shifting abroad. Only 33% of Nintendo sales come from the Americas, meaning two thirds of Switch users fall into Netflix’s target geography. 

Is It Possible? 

Microsoft have recently scooped up Activision for a cool $70 billion. With a $170 billion market cap, it’s unlikely Netflix could acquire a leading publisher (Ubisoft’s €6B market cap is another story). With an enterprise value of $44 billion, Nintendo’s acquisition is not outside the realms of possibility.  

Due to high levels of debt, Netflix is notoriously referred to as ‘Debtflix’. In 2021 their long-term credit rating was upgraded to blue chip status by S&P Global Ratings. Their debt was upgraded to BBB by S&P, the lowest tier of investment grade, with a stable outlook. This factor was based on Netflix improving operating margins and cash flow. 

A $44 billion issuance would take their long term debt to $62 billion, less than half their market cap and a debt/equity ratio of 3.9. In a world where the likes of General Electric boast a ratio of 8.35 or UPS sit at 6.35, this is not uncharted territory.

The challenge of integrating a hundred year old Japanese institution into an American FANNG would be another matter entirely. 

Conclusion

An acquisition of Nintendo by Netflix is incredibly unlikely, but not impossible. Netflix have repeatedly stated their desire to build their own games infrastructure in-house. However, in a  market dominated by Xbox and Playstation, it’s unlikely Netflix will be able to mount any sort of attack without some form of acquisition…over to you you, Mr Hastings.

-DB