The Impact of the Netflix Deal on Warner Bros' Gaming Division

Following a tumultuous 12 months marked by financial struggles, studio closures, and restructuring, Warner Bros. Games faces a new challenge: the possibility of a new corporate owner. The division is part of the sale of Warner Bros. Discovery to Netflix, which has been met with a rival bid from Paramount Skydance. Both potential buyers are courting shareholders, and the outcome will require regulatory approval, leaving the deal's closure months or years away. Regardless of the result, there is widespread concern about the impact on Warner's gaming teams. As the only major Hollywood mega-studio to maintain a strong presence in gaming, Warner owns successful mobile games and AAA studios like Netherrealm, Avalanche, Rocksteady, and TT Games, as well as support studios in the US and Canada. The company has had notable hits, including TT's Lego games, Rocksteady's Batman Arkham series, and Avalanche's Hogwarts Legacy, which has sold over 30 million units. In contrast, Netflix has yet to make a significant impact in gaming, despite years of effort. After a failed investment in AAA games and deciding against bidding for EA, the company has shifted its focus to casual, second-screen games, supported by licensed titles like GTA. Games head Alain Tascan has committed to titles that utilize the phone as a controller, with a focus on multiplayer, kids, narrative, and mass appeal, as well as an eye on the social layer that Roblox, Fortnite, and Minecraft deliver. The company has cancelled unannounced publishing deals with external studios and shut down the developer of its successful Squid Game mobile title. Netflix plans to borrow $59 billion to pay for Warner and will look to asset sales to reduce the figure post-completion. On the surface, the prospects for Warner's game division under Paramount appear more promising. Paramount's subsidiary Skydance has published VR titles, and the company has a history of licensing its IP for games. David Ellison, who leads Paramount Skydance, has greenlit and shipped multiple AAA games, whereas Netflix has not funded a game with a budget over $5 million. The optimistic view is that Netflix will reconsider its approach post-acquisition, and Alain Tascan will be able to harness and direct the division accordingly. Others believe that Netflix could boost the value of its premium subscription tier by allowing access to Warner's games and deepen fan engagement. However, some experts are pessimistic, arguing that this deal heralds another round of industry downsizing from a company that has bought a business it doesn't need. They believe Netflix will initially leave the studios alone before making cuts and eventually dismantling WB Games due to the financial outlay of AAA games. Many see Paramount as a less disruptive prospect, with Skydance likely to value Warner's game studios highly. The game industry is retrenching, and few buyers are in the market for acquiring studios. However, some investors see value in Warner's marquee assets, such as NetherRealm and Avalanche Software, and believe they could find a healthy buyer universe. The prospects are brightest for Avalanche, with the success of Hogwarts Legacy, and Netherrealm, buoyed by the consistent performance of Mortal Kombat. Rocksteady's outlook is gloomier due to the underperformance of Suicide Squad. Strategic buyers, major publishers, platform holders, and private equity seeking revenue quality would likely take a look in a strategic carve-out scenario. A notable new buyer in the event of Netflix prevailing might be Paramount, which could soften the blow of missing out on film studio assets. However, integrating the studios would be a significant undertaking and would inevitably involve layoffs. The outlook remains uncertain, with some experts believing that Netflix is a train wreck for games and interactivity, while others see a brighter future for the industry, with games becoming a first-class content pillar.