Media streaming veteran Netflix (NASDAQ: NFLX) went back to shopping. The company did not purchase a content portfolio this time around. It wasn’t even a movie production set. Netflix also wants to develop original content for its budding video game service. This week’s buyout therefore involves a small video game producer named Night School Studio.
I think I know what the new Netflix affiliate is going to be working on right now. Beyond that, let’s think about how Netflix’s buyout strategy is helping the company achieve its business goals.
What is Netflix buying?
Night School Studios is a fairly small but well-respected game developer. Founded by a former developer at Telltale Studio, the company with 30 names on its payroll had $ 5 million in revenue last year. These numbers are mere rounding errors at the much larger Netflix company, which employs more than 9,400 people and generated $ 25 billion in revenue in 2020.
The developer has four games to his name but is best known for his debut title, the acclaimed supernatural thriller Without beef. The buyout shouldn’t change Night School’s plans to release a sequel to Without beef in 2022.
In addition, the studio already has experience working with Netflix. In 2018, when Telltale Games landed the license to develop a video game based on the hit Netflix Strange things, this studio called on Night School to help with this project. The game never made it to store shelves, as Telltale went out of business later that year.
This buyout looks like an effort to launch a new Strange things Game. Without beef has been described as a video game version of an “80s teen scary movie”, and Night School should already have the groundwork for a Strange things title ready to go. This partnership is located in the wheelhouse of Night School.
How much did the evening school cost?
The press documents did not mention the size of Netflix’s first investment in video games, but this was likely another relative rounding error.
The company isn’t used to spending billions of dollars on flashy buyouts. Instead, Netflix prefers to inject a few million dollars into each buyout. The big expenses come later when the acquired talent is put to work to develop real content.
Another initial investment of $ 30 million was the ABQ Studios production facility in New Mexico. The Millarworld deal would have been a $ 30 million investment and the StoryBots buyout would have to be along the same lines. Millarworld and StoryBots sales and employee counts were also similar to the Night School numbers. From the back of my briefcase, these converging data points suggest this acquisition could be worth between $ 30 million and $ 50 million.
But the company has spent more than $ 200 million shooting movies and series at ABQ studios, with a firm commitment to add at least an additional $ 1 billion to that budget over the next two years. The first Millarworld series, Jupiter’s legacy, also had a production budget of $ 200 million.
I’m not saying Netflix will hand over a $ 200 million budget to Night School’s Strange things development, but this game should definitely get a lot more funding than Without beef. And that’s just the start of a lifelong relationship, which could give Netflix’s fledgling games service quality content in a hurry.
It’s a smart and safe Netflix investment
Netflix has a long history of developing popular and beloved content for the small screen. However, it remains to be seen whether this impressive track record will translate into comparable success for the upcoming games service, which will start as a free add-on for subscribers to the video streaming platform.
Night school is a low risk investment with a strong creative history and presumably a modest price tag. At the same time, the upside potential could be immense if this humble buyout helps Netflix become a major player in the video game industry in the long run. I love low risk, high return investments, although the potential payoff is not guaranteed, and I can’t wait to see how Netflix puts its first game development team to work.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.