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Nov 5 2019
Google Stadia – will cloud gaming finally become a big business?
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33 min
What’s Happening
Three weeks ago, Google confirmed that its cloud game-streaming service Stadia – one of the many contenders to be the so-called “Netflix for games” – will launch on Nov 19 2019. Stadia, which was revealed in Jan 2019, does not require a console or its video games to be downloaded to specific hardware. Instead, it can run high-end games on cloud servers that can be played directly by streaming over the internet with low-end hardware. For example, users will be able to stream Stadia games to Chrome on their PC, a Pixel 3 smartphone, a Chromecast-connected TV, or a tablet, transitioning between devices if needed with minimal interruption. Users will, however, need download speeds of at least 10-35Mbps, depending on the level of service, meaning Stadia will work with good wifi but not cell network connectivity.
Google’s broader vision for Stadia encompasses social elements and integration with YouTube – e.g. click a YouTube ad for a game to instantly start playing, simultaneous play and stream to YouTube (inviting followers to join in), split-screen multiplayer gaming with friends. Stadia builds upon Google’s Project Stream experiment in late 2018, in which graphics-intensive games were streamed to a Chrome browser. Because compute-intensive activities take place in the cloud with rendered frames coming back to the interface, even low-end devices with sufficient bandwidth could theoretically serve as gaming hardware. While Stadia appears to be performing well on games like Assassin’s Creed Odyssey, others have reported a slight input lag detectable in games requiring fast precision shooting such as Doom.
On Nov 19, Stadia will be available in 14 countries on a limited preorder basis for customers purchasing the “Founders Edition” (which sold out last week) or “Premiere Edition” packages. Each package costs $129 and includes at least a Stadia game controller and Chromecast Ultra device for streaming to a TV (each device costs $69 on its own). Both packages include 3 free months of the Stadia Pro streaming service (with 4K HDR streaming, 5.1 surround sound, about one free game per month, and discounts), which will cost $9.99/month after it’s released more broadly. In 2020, Google will also release a free Stadia Base streaming service, without higher-end resolution/sound or free games.
Google appears to be taking a freedom of choice” approach with respect to gaming hardware, for instance allowing users to use non-Stadia controllers or mouse and keyboard (in addition to its own controller). While Stadia will initially be limited to Google devices and Chrome browsers, Google also plans to eventually expand to more Android phones, Apple TVs and iOS devices, and Roku.
Stadia users, in many cases, will be buying individual games or 3rd-party bundles/subscriptions. Google has confirmed 38+ games so far, including popular franchises made by well-known publishers such as Electronic Arts, Ubisoft, and Rockstar Games. The list also includes several titles that will be launched exclusively on Stadia. Google is building out multiple “first-party” (i.e. in-house) gaming studios, such as the new Stadia Games and Entertainment, to develop Stadia-exclusive games. It has been hiring industry veterans, in addition to acquiring VR gaming studio Owlchemy Labs in 2017. Both 1st– and 3rd-party developers for Stadia will reportedly have access to tools such as Style Transfer ML, which offers AI-powered transfer of skins and textures to the gameplay environment, cutting down on development time.
Stadia games will run on a powerful distributed cloud architecture set up across 7,500 locations globally, with each Stadia server having a custom AMD GPU chip that can output 10.7 teraflops of performance. The output of Stadia’s GPUs is comparable to a high-end PC and exceeds that of gaming competitors – e.g. Microsoft Xbox One X‘s 6.0 teraflops, Sony PS4 Pro’s 4.2 teraflops (though consumer bandwidth will still be a limiting factor on the user experience). According to Google, the processing power will eventually allow Stadia-exclusive games to do things not currently possible on other consoles, such as Google Assistant integrated into the gaming experience or full physics simulations (although it may take a few years).
Google also has industry relationships through its Google Play store, which currently houses about 350,000 games (largely mobile games for Android). In Sep 2019, it launched a $4.99/month subscription service called Google Play Pass with access to 350+ games, in which developers are paid based on engagement metrics. Google also markets its Google Cloud for Games platform for studios and game developers, offering cloud infrastructure to power cross-platform gaming at scale, including a recently launched Game Servers management tool to support running large multiplayer games.
Google is just one of many entities across big tech, gaming, and telecom vying for position in the cloud-gaming and game-streaming market:
Microsoft
Last month, Xbox owner Microsoft took a big step on its journey towards a “post-console future” with the launch of public testing for its own device-agnostic game-streaming service Project xCloud. The project enables direct streaming of “console-quality titles” from the cloud to smartphones and tablets with the Xbox Game Streaming App (currently limited to Android). An Xbox console is not needed, though the service does require a compatible Xbox controller with bluetooth as well as download speeds of at least 10Mbps (wifi or mobile data). Gamers in the US, UK and South Korea can sign up for an invite, which are being released in waves. Early reviews have shown signs of promise as well as pain points such as video stuttering and occasional input lag. Pricing has not been announced, but industry watchers are projecting in the $15-25/month range for a subscription.
In parallel, Microsoft is piloting an Xbox Console Streaming offering, which allows gamers who have an Xbox One with games already installed to stream them to the Xbox Game Streaming App on their Android phone or tablet. (Microsoft also operates two related offerings – the Xbox Console Companion App which allows remote play from consoles to Windows 10 PC systems on the same home network; and Xbox Play Anywhere digital games which can be played on both Xbox One and PC with the ability to switch between them mid-game.)
For xCloud, Microsoft is putting Xbox One S console cores on server blades (up to 8 on each) in data centers, which makes it easier for Xbox developers to bring games to xCloud. Microsoft has said that xCloud will support any existing Xbox game (currently 3,500+) with 100% compatibility. It also means that the service is only as fast as an Xbox One S and, unlike Stadia, won’t be capable of 4K visuals at 60 frames per second. However, with the announcement of Google Stadia’s expected 10.7 teraflops (vs. the Xbox One S’s 1.4 teraflops), Microsoft is expected to upgrade its xCloud servers to the next-gen Xbox Project Scarlett console when it is released in late 2020.
Microsoft has long been a major player in the game industry, with its gaming unit a big $11.4B business representing 9% of overall revenue. Its Xbox, however, is currently lagging Nintendo Switch and PlayStation, and has lately been challenged by declining hardware sales as the current Xbox generation ages. Subscription services allowing users to play games online or download games have been a bright spot of growth. Examples of subscriptions include Xbox Live Gold (incl. online multiplayer games), Xbox Game Pass PC (unlimited access to 100+ PC games), Xbox Game Pass Console (unlimited access to 100+ console games), and Xbox Game Pass Ultimate (bundle of all the above). The Xbox Live online service/account had 65M monthly users earlier in 2019 (though growth may be slowing) and Game Pass has an estimated 9.5M monthly users. Given these numbers, Microsoft is expected to incorporate both Xbox Live and Game Pass into its xCloud strategy.
Microsoft has an extensive list of well-known games – such as Halo and Minecraft (perhaps the best-selling game of all time) – though some have pointed to the most successful titles’ relative age as a signal of running out of ideas. Lately, however, Microsoft has been actively investing in games for its platforms, becoming an aggressive acquirer over the past couple years. It now has 15 first-party game development studios operating semi-autonomously under its Xbox Game Studios umbrella. It has also operated since 2014 the ID@Xbox program for independent game developers to self-publish games on Xbox One and Windows PC, paying out $1.7B to independent developers since launch.
Microsoft has estimated that the business of selling Azure cloud services to game publishers could be as much as $70B. It offers an Azure gaming solutions portfolio under the Microsoft Game Stack umbrella, most recently acquiring PlayFab in 2018 to add its developer tools for cloud-connected games to the portfolio. It made waves lately with the recent landing of longtime rival Sony as an Azure customer (see below).
Project xCloud is likely to evolve, for instance integrating AI for a more personalized and responsive service (e.g. predicting which game a user wants to play). It is also rumored that Xbox games via xCloud and Xbox Game Pass may eventually become available on the currently top-selling Nintendo Switch console (Nintendo lacks a cloud gaming platform but its leadership has been vocal about the need to keep up with cloud gaming). Industry watchers are also speculating that, like Stadia and YouTube, Microsoft may bring together xCloud and its game live-streaming platform Mixer (which was acquired in 2016 as Beam). Mixer has lagged Amazon’s Twitch and other competitors, but has lately been making noise for poaching popular gaming personalities from Twitch to its platform.
Amazon
Among the top 3 US cloud giants, Amazon appears to be the furthest behind on the cloud gaming front. After experimenting since 2014, Amazon was reported in Jan 2019 to be working on a game-streaming service for launch as soon as 2020 and already in discussions with game publishers. It has been actively hiring for gaming professionals (incl. a general manager for Game Distribution Services), as well as signaling efforts in acquisitions and partnerships in the gaming space. Amazon also recently posted roles hiring for a “stealth advertising innovation” team, working with 3rd-party gaming companies to build a programmatic customer-acquisition system for gamers, powered by machine learning and extensible to other industries.
Among Amazon’s most prominent gaming-related assets are AWS-powered gaming development engine Amazon Lumberyard and game live-streaming platform Twitch. AWS Lumberyard, a hard fork of CryEngine licensed from Crytek in 2015 that is now available for free to game developers, has struggled both in the marketplace and as the development engine for Amazon’s current slate of multiplayer games. Twitch, on the other hand, after being acquired in 2014 for $970M, has found success as the #1 game live-streaming platform with now 15M+ daily users and estimated $400M in revenue last year. Twitch Prime, a premium experience, is included as part of the Amazon Prime subscription. Amazon also has key assets in the Fire TV streaming devices, Prime Video content streaming, Alexa games, its ecommerce platform with PC games store offering digital downloads, and 100M Prime subscribers.
Amazon AWS, the #1 player in public cloud, serves as the cloud infrastructure for a number of game studios, counting Fortnite (Epic Games) and Ubisoft as clients. Since last year, it has been marketing its AWS services for the gaming industry under the “Amazon Game Tech” umbrella. It offers a backend with global multiplayer game-server hosting (Amazon GameLift), machine learning, and petabyte-scale data services; live operations analytics and monitoring; game development tools like Amazon Lumberyard, GameSparks fast feature development, Twitch integration, and voice-first Alexa solutions; and marketing and engagement through Twitch extensions, Amazon’s ecommerce platform and Amazon GameOn’s cross-platform competitions.
Its in-house publishing studio Amazon Game Studios (based in Seattle, Irvine and San Diego, with about 800 staff) turned to higher-end “AAA” games around 2014, about the same time it acquired game studio Double Helix. Since then, it has published a single console game (The Grand Tour) in Jan 2019, which has not sold well. There have been signs of a major strategy reset over the past couple years, with the shutdown of the brawler game Breakaway for not being “breakthrough” enough, hiring of a new VP, and layoffs of a few dozen employees earlier this year as part of a reorg to “match evolving, long-range priorities.” It has lately been working on several massively multiplayer online games – New World (sandbox world), Crucible (multiplayer shooter), and Lord of the Rings – some of which have been in development since at least 2016.
Sony
Sony is an established video game industry player, with PlayStation being the top-selling game console in the world until recently (when Nintendo Switch took over the title with the aging of the current generation of PlayStation; PS5 will come out late 2020). It also has 13+ in-house game studios globally, as well as a deep library of games.
Sony has had its own game-streaming subscription service PlayStation Now since 2014 (built on its acquisitions of Gaikai and OnLive), but has only gained 700,000+ subscribers to date. PlayStation Now offers all-you-can-stream of about 800 games for console and PC at $9.99/month (or $59.99/year). The service claims “ultra-low latency with [a network connection of] only 5 Mbps,” though there have been complaints about choppiness. It is delivered via data centers with miniaturized PlayStation console components (up to 8 console equivalents on a single motherboard). PlayStation Now and PlayStation Plus (subscription with access to online multiplayer gaming) are part of the broader PlayStation Network online service, which has 94M+ users and is best known for enabling console owners to participate in multiplayer matches. Sony also offers PS4 Remote Play, which enables now 5.6M PS4 owners to remotely connect with and control their PS4 system from a Mac or PC. The success of Remote Play has been one of the drivers of Sony’s push to expand PlayStation Now, rolling it out to 19 countries.
In May 2019, Sony shocked the gaming industry by announcing a new partnership with rival Microsoft. The two will develop new cloud-based gaming solutions to support both their streaming offerings, incorporating Sony’s semiconductor and image sensor technology and Microsoft’s Azure cloud and AI. Both are currently using console hardware in data centers for their offerings, which helps with compatibility but limits performance and scalability. The partnership will also “explore” use of Azure cloud and data center solutions for Sony’s existing game- and content-streaming services. Lastly, the two will work on game development platforms, likely enabling content creators to develop games compatible with both services. The deal reportedly took place after talks between Sony and Amazon (which hosts PlayStation Network) couldn’t align on commercial terms.
Electronic Arts (EA)
In Sep 2019, popular game publisher Electronic Arts announced a public test of its new cloud game-streaming service Project Atlas, which has 1,000+ employees attached (incl. from its 2018 GameFly cloud-gaming acquisition). The technical test, which will include 4 games and a limited number of participants, is designed to see how the service’s performance and quality stands up across network conditions and server routing scenarios. Powered by AWS, Project Atlas’s intention is to extend to laptops, tablets, phones, smart TVs, and streaming devices. In addition to cloud gaming, Project Atlas will also integrate EA’s Frostbite game development engine and online game services such as social, discovery, and personalization. EA also has a vision for AI in Project Atlas that includes contextual behavior from non-playable characters, real-time commentary in sports games, and original relevant music during gameplay.
EA has an existing download subscription service called Origin Access ($5/month) with 200+ games, and an Origin Access Premier subscription ($14.99/month) that also offers early access to anticipated games.
Valve/Steam
Popular PC game distribution platform and developer Steam announced its new game-streaming service Steam Link Anywhere in Mar 2019. The new service extends Steam Link, which allowed gamers to stream from their computers to other in-home devices. Steam Link Anywhere will allow gamers to stream downloaded games from their PCs to any Steam Link hardware or mobile device with the Steam Link app anywhere. This is not a “Netflix-like” game-streaming subscription but rather an effort to make its service more valuable to users and stay relevant without taking on the cloud costs. Steam has lately been facing pressure from online multiplayer games, competitor platforms (e.g. Epic Games Store), and game publishers seeking a larger cut of revenue.
Ubisoft
Ubisoft, another popular game publisher, launched its own streaming service Uplay+ in Sep 2019. Uplay+ offers access to 100+ Ubisoft PC games (e.g. Assassin’s Creed) for $14.99/month, including early access to some games and exclusive premium content. While initially only available on Windows PCs, Ubisoft is partnering with Google to launch Uplay+ on Google Stadia sometime in 2020. The platform appears to be experiencing early growing pains, with users complaining about billing after cancellation, duplicate charges, inability to remove credit card information, and suspended subscriptions.
Nvidia
Nvidia’s GeForce Now allows users in its free public beta to bring their library of PC games from popular digital stores (with 400+ supported games) to a remote desktop in the cloud, to be played even on low-performance machines. GeForce Now is compatible with PCs, Macs, Nvidia‘s Shield-branded devices and TVs, and now Android phones. The beta has been in North America and Europe since around 2017-2018. Last month, Nvidia began to roll out its GeForce Now game streaming service to Android phones, initially as a beta in South Korea.
In Mar 2019, Nvidia announced the GeForce NOW Alliance, a group of companies that will use Nvidia’s RTX cloud gaming servers and cloud gaming software to provide localized cloud gaming services around the world. Its partners include SoftBank (Japan), LG U+ (Korea), and SAFMAR Group (Russia), each of whom are introducing GeForce Now in their respective markets in different ways. SAFMAR Group, for instance, just launched a $15/month service in Russia under the GFN.ru brand. Early alliance partners include telecom companies who plan to leverage investments in 5G and fiber networks to expand cloud gaming globally.
Nvidia also offers a GameStream service that allows streaming of games from a GeForce GTX PC to an Nvidia Shield TV or tablet. An unofficial open-source implementation of the GameStream protocol, Moonlight, allows anyone with a GeForce graphics card to stream games across Windows, Mac, Linux, Android, iOS, Chrome OS, and Amazon Fire OS devices.
Verizon
Since Jan 2019, the telecom player has been quietly conducting early tests of a streaming service called Verizon Gaming with 135+ games. The service is currently accessed via Nvidia Shield set-top boxes pre-installed with the Verizon Gaming app, as well as through Google Play. While Verizon has been tight-lipped, company documentation suggests that Verizon Gaming will eventually be expanded to Android phones. Job postings hint that the effort will leverage Verizon’s 5G investments, which offer the potential for high bandwidth and low latency. Verizon has rolled out 5G to 13 cities as of Oct 2019, and plans to have reached 30 cities by end of the year.
Chinese players
  • In Apr 2019, Chinese gaming giant Tencent began a limited test of its START cloud game-streaming service in Shanghai and Guangdong. The service claims to allow “play on any device.” Over the past year, Tencent has been engaging in cloud-gaming partnerships with firms outside China – with Intel on a cloud-gaming service called Tencent Instant Play, with Unity Technologies to help developers release games in China, and with Razer on cloud-gaming standards for peripherals. Tencent also this year launched digital game stores WeGame (in China, replacing the Tencent Games Platform) and WeGame X (in international markets), which allow users to instantly play titles using cloud gaming without download. Tencent Cloud also markets a Cloud Gaming Solution for game publishers and developers, and is looking at partnering with set-top box operators in China.
  • NetEase, the 2nd-largest gaming company in China, and Huawei X Labs announced earlier this year that they would set up a joint innovation lab to explore cloud gaming on 5G – e.g. game design, user experience standards, reducing latency. It will focus on capitalizing on the advantages of 5G for cloud gaming, as the next evolution from 4G for mobile gaming. Huawei is experimenting with allowing users of its devices to play NetEase games through the Huawei Cloud PC app (Windows 10 as a monthly subscription or by the hour), reporting a lag of less than 20ms with 5G.
  • Alibaba, the #1 cloud player in China, has been working to position itself with a portfolio of cloud gaming solutions. It recently jointly launched a cloud gaming solution with Asian GPU virtualization and streaming platform Ubitus, bringing Ubitus’ offering for telecom carriers (e.g. Vodafone), game publishers, and digital services firms to Alibaba’s public cloud. Alibaba also reportedly has a tie-up with Intel in cloud gaming.
Other players
  • Shadow, owned by French startup Blade, offers a full Windows 10 instance available via the cloud for a monthly subscription fee (€12.99-€39.99, depending on the package). According to Shadow, its “full PC” model can be used for anything – e.g. Word, Photoshop, or Steam – and will be available on any platform. It recently raised a $33M round of funding and announced a new interface designed for TVs and mobile devices with a launcher that lists all games. It currently has 70,000 customers across 8 countries.
  • Other players include: Vortex by RemoteMyApp (cloud-gaming subscription with free-to-play or user-owned games via Steam), Remotr by RemoteMyApp (allows users to stream games from their own PC to their devices), Rainway (allows users to stream downloaded games from their PC to another computer or device through a web browser), HP Omen (streaming from Omen PCs to other Windows 10 PCs), Utomik (unlimited subscription with games from 75+ partners using “smart downloading”), Jump (unlimited subscription with mostly indie games using “non-streaming data transfer”), Hatch and Gamecloud (cloud-gaming on mobile with premium games), LiquidSky (cloud-gaming with “open catalog” allowing users to upload any PC game), Vectordash (cloud gaming with bring-your-own-games), Russia-based Playkey (buy- or bring-your-own-game cloud-gaming subscription via Steam, Uplay and Origin), Parsec (desktop streaming service billing by the hour), Paperspace (full virtual “gaming PC in the cloud,” using Parsec streaming software), Redfinger (Android emulator with cross-platform access to Android apps/games), and Spanish startup PlayGiga (B2B cloud-streaming solution for telecom/5G and other companies). The list doesn’t end there – there are also ongoing rumors of new entrants coming, such as Square Enix, Activision Blizzard and Walmart.
What It Means
It may take up to 5 years for cloud gaming to make a substantive impact on the industry and even then it won’t take over the whole industry – there will probably still be a console market left standing (and perhaps even thriving). None of the big console makers are signaling a pullback anytime soon from their console roadmap. However, for those who haven’t been paying attention, video games are a big business – $152B. The reasons why so many players are gearing up for cloud gaming are that it will likely be lucrative and, at this point, it appears inevitable. As 5G rolls out globally and connectivity gets better, cloud gaming will begin to eat up the middle layer between high-end local gaming on expensive consoles and casual/mobile games downloaded to devices.
Currently, however, cloud gaming is a remarkably messy space. Not everything called cloud gaming is actually cloud gaming – i.e. game-streaming with processing in the cloud and with rendered frames delivered to a “thin client” on the user’s device. Subscriptions based on downloaded games – a more traditional model typical of digital distribution platforms (e.g. Steam, Epic Games Store) and mobile games (e.g. Apple Arcade) – are generally not cloud gaming. Even some of the newer “fast-start” game subscriptions like Utomik and Jump use a form of “smart downloading,” in which part of the game is downloaded first, rather than cloud gaming.
The use of the shorthand phrase “Netflix for games” is also usually a misnomer and a common source of confusion. Google Stadia, for instance, a non-content player seeking to operate in the high-end AAA game space, is offering limited subscriptions rather than an “all-you-can-eat” Netflix-style offering. Owners of the most popular games have enormous negotiating clout, which can make the economics challenging. In today’s world, an AAA console-quality game might cost $5-7M (and up to $30M) to make, a video game is priced at $50-60, a game publisher might make 50-88% on a digital sale, and not every game is a hit. With the going price point for a subscription anchoring in the $10-20/month range, it can be tough to come up with a business model that works for an AAA game publisher as well as the provider(s) of cloud infrastructure and streaming services.
Others not able or willing to put forth an “all-you-can-eat” subscription are gravitating to an array of different models:
  • Many, like Stadia, are adopting a model that looks something more like iTunes than Netflix, where the content is purchased and then streamed from the cloud.
  • Some are touting a kind of “bring-your-own-iTunes” model where users can connect their library of purchased content from a separate digital distribution platform (like Steam), or even upload PC games, to stream from the cloud.
  • One approach to this offers a remote desktop or high-end virtual machine (“gaming-PC-as-a-service”), typically running Windows, where users can access games delivered to a browser or app.
  • In some cases, as with Valve, players may prefer not to take on the cost of the cloud infrastructure, instead offering new ways for users to stream from their own PCs or consoles to other devices (“self-streaming”). With this model, users take responsibility on both ends for connectivity and storage.
  • A few are taking the avenue of marketing B2B cloud-gaming solutions to help smaller players (e.g. telecom/5G carriers, game publishers) roll out their own local or limited offerings.
It’s not a coincidence that the big cloud players and big game publishers are the frontrunners in cloud gaming. They own the scarce, expensive assets needed to deliver on the promise of cloud gaming. Google, Microsoft, and Electronic Arts have the most ambitious efforts underway, though there are plenty of candidates for a dark horse to come from behind – and also plenty of potential acquisition targets left. Success for any major cloud-gaming endeavor will depend on the alignment of platform and content, which means big partnerships lie ahead. We are already seeing the signs of this with the Sony-Microsoft, Nintendo-Microsoft (rumored), and Ubisoft-Google partnerships.
While “all-you-can-eat” pricing can undervalue new hit video games, cloud-streaming can help publishers extend the economic lives of their games/franchises as they age. In addition to subscriptions, Amazon and some of the larger AAA game companies have ambitions of creating online worlds that live across platforms, as immersive social networks. Sony’s PlayStation VR virtual-reality gaming headwear, for instance, sold a healthy 1.3M units in 2018. The “platformization” of video games can also open up new business model opportunities for legacy games such as free-to-play platforms with in-game purchasing and downloadable content. We may see more publishers follow Electronic Arts’ and Ubisoft’s example and set up streaming services of their own to maintain a direct relationship with customers, probably tapping existing vendors for the technology.
Game publishers who have their own big in-house libraries and are looking towards cloud gaming will still need to rely on a cloud vendor as a strategic cloud partner and/or cloud-gaming platform. Most publishers lack the necessary technology and operational infrastructure (e.g. cloud, AR/VR, AI, graphics computing, subscription model) to meet the demanding needs of, say, fast-paced multiplayer games with 100 players across platforms. Long-time rivals Sony and Microsoft, for instance, appear to be deconstructing their respective offerings to work together on common technologies and infrastructure that can compete with other heavy-hitting market entrants. The choices for a cloud partner are limited. Google has one of the more promising platforms right now with Stadia but Microsoft knows games and Amazon might be the least threatening right now (except for its tendency to expand its scope to overtake its partners), while Tencent and Alibaba offer a path into the massive Chinese gaming market. Nearly all are investing in cloud-gaming platforms as well as marketing cloud-gaming solutions on their respective public clouds.
We can also expect the cloud-gaming platform players to continue acquiring game developers to gain exclusive distribution rights. Content will be a deciding factor as to which game-streaming platforms win. As we have said elsewhere (see our Oct 24 2019 brief Disney+ and the age of video-streaming wars), the cliché is that “content is king” but in today’s environment, what is king is actually the customer. In gaming, which is becoming an even more social activity than it already is, it will be about where your friends are and what they are watching on live-streaming platforms (e.g. Twitch). Given the implied network effects, quality will dominate quantity (over a certain minimum), and outsized gains will accrue to the platform that can attract (or own) the few most popular games. As we have seen in the world of video-streaming, the owners of the most popular content will be in an advantageous position as they shop their catalog of games to streaming platforms for the most favorable financial terms. Independent game publishers and developers will also be increasingly in demand as platforms look for the next game that can generate a huge following.
We should also expect to see greater integration of game-oriented social and live-streaming platforms with cloud gaming, such as what Google Stadia is planning with YouTube. Microsoft’s xCloud and Mixer are another obvious pairing, as well as Twitch with whatever cloud gaming service Amazon comes out with. Other gaming communities such as Discord could be attractive acquisition targets as well.
We shouldn’t forget, however, that not all the technical problems have yet been solved. There have been a number of notable game-streaming failures in the past – e.g. GameFly Streaming, OnLive, G-cluster. Laggy gameplay was the most common pitfall. Latency in gaming is a big deal – delays in sending and receiving data have a significant impact on the user experience and gaming, perhaps more than ever, is experience-driven. Cloud gaming is much harder than video-streaming, requiring more than sending preprocessed packets of data. A gaming environment might require response to inputs and synchronization of large quantities of data in a matter of milliseconds – e.g. in a game with 100 simultaneous players such as Fortnite, or a fast-paced first-person shooter – with processing in the cloud and delivered to an end-user device at 60 frames per second. Depending on the type of game, inability to play seamlessly can be a nonstarter.
It is still an open question as to whether the new generation of game-streaming providers can deliver on the desired experience. At this point, virtually every provider and entrant has had lag or stutter issues to varying degrees, though Stadia is the most promising right now and it is still early days. In many environments and markets, connectivity is also still a limiting factor (which is another reason why consoles aren’t going away anytime soon). This also points to another issue: While game-streaming providers can invest heavily in their own capabilities, it is harder to control for their customers’ connectivity and location, resulting in negative perception of the experience and brand.
There is also the risk of throttling by telecom carriers, some of whom may be pursuing game streaming offerings of their own. Cloud gaming requires sizable quantities of data, as much as 16 GB per hour of play (vs. 1-3 GB for an hour of Netflix). For users with data caps on their wifi (a common, though not widely known scenario), this means they could burn through a monthly 1-terabyte limit in just 65 hours of 4K streaming.
One of the key drivers for cloud gaming is the rollout of 5G, which promised speeds up to 100x faster than 4G/LTE with low latency (though current speeds are far lower). Wireless carriers have been deploying across the globe, rapidly in the US, China, South Korea, Japan and UK and more slowly elsewhere. Telecom players are eager to capitalize on their investment, and are expected to bring their own or 3rd-party cloud-gaming services to their wireless and in-home customers. While mobile access is a big part of cloud gaming’s value proposition, true 5G smartphones won’t be out en masse until next year and we won’t see meaningful penetration until a few years after.
The rollout of 5G in China has sparked a parallel competition among the Chinese cloud players and game publishers. China is expected to be the biggest cloud-gaming market in the world, which means non-Chinese publishers are also interested in capitalizing on their IP there. Some players like Tencent are actively working to serve as a channel for game developers to enter China, helping them navigate the market. China is a different environment for gaming, where consumers are less accustomed to the paid subscription model. Chinese regulators also have a history of suddenly suspending game licenses, increasing the uncertainty for those looking to invest in the market.
It’s not obvious to what extent the paid subscription model for games will find success even outside of China, beyond the largest publishers of ultra-popular games (e.g. Electronic Arts). For one, the content purchase cycle for AAA games is different than, say, video-streaming. A serious gamer might play 2-3 games per month, whereas a consumer might watch dozens of videos on Netflix each month. The variety of games offered by a subscription is less meaningful as a result. Another potential barrier to the game subscription model is the popularity of free-to-play games such as Fortnite or Apex Legends. If free-to-play games (which were 80% of digital games revenue in 2018) continue to dominate the gaming industry, a paid subscription model for games might be harder to sustain. Other subscription models, however, such as for access to the services surrounding online multiplayer games (similar to Xbox Live Gold) and cloud gaming, may be more viable.
The free-to-play dynamic is closely related to the broader theme of greater openness that has been growing across the industry. The extraordinary success of cross-platform online games like Fortnite has demonstrated the advantages of openness in drawing a larger audience and extending the reach of expensive-to-produce games. The big gaming ecosystems have traditionally operated as semi-walled gardens. What we’ve seen lately is a breaking down of those walls, with even long-time rivals Sony (PlayStation) and Microsoft (Xbox) coming together to cooperate. EA and Valve’s partnership, in which they agreed to connect Origin and Steam’s friends lists, is another example. Cloud gaming takes this further, opening up the variety of devices that games can be played on, removing the upfront requirement of a console or gaming PC (not to mention the ongoing cycle of hardware upgrades thereafter), and lowering the initial cost to play a given game.
Microsoft appears to be doing particularly well in moving on significant deals with key players – remarkably so, given its position as incumbent and rival to some of its new partners. Certainly, Azure’s top-2 position in public cloud and Microsoft’s knowledge of the gaming industry are among the factors. Microsoft’s commitment to its Azure cloud play is probably a factor as well – the potential to sell $70B in Azure services to game publishers might seem a bigger deal than the $11B gaming unit it has today rooted in a console hardware business with an uncertain future. Right now, Microsoft seems to be positioning itself as committed to xCloud and gaming while taking an open approach to the ecosystem. CEO Satya Nadella has said, “We’re in gaming for gaming’s sake. It’s not a means to some other end.” Microsoft also has bolstered its open-source credentials over the past few years, escalating its commitment over time.
There are two modes of thinking about cloud gaming – either it’s a niche offering that doesn’t solve any cogent need and is unlikely to be widely adopted by serious gamers, or it has the potential to open up new experiences and audiences while tearing down the walled gardens of traditional gaming ecosystems. The short answer is that it’s probably both. In the near term, while technical challenges and market dynamics are being worked through, it will be slow going and we’ll probably hit rock-bottom of the hype cycle at some point. In the longer run, we will see massive, ambitious multiplayer projects enabled by what we call cloud gaming today, crossing the barriers of platform and device, some of which will crash and burn and some of which may become part of our cultural fabric.
Disclosure: Contributors have investment interests in Microsoft. Amazon and Google are vendors of 6Pages.