January 2, 2019

Cloud Gaming: Gold Mine or Fool’s Gold?

Stakes Getting Higher as Charter Invests in Cloud Gaming Startup

The already-hot category of cloud gaming just got hotter, with Charter Communications announcing an unspecified investment in the cloud-based computer gaming service, Blade.

This move on its own is a significant expansion of a major player into a completely new consumer technology sector. Taken in the context of other recent similar moves by other large tech companies, Charter’s announcement reinforces TDG’s prediction that cloud-gaming will be one of the largest tech themes of 2019.

What is ‘Cloud Gaming’?
As detailed in TDG’s new report, the video game industry is in the early stages of a major technology-driven disruption, as powerful in-home devices (game consoles and high-end gaming PCs) are supplanted by cloud-based gaming services. These new services will not require users to buy or download games (or in many cases, or even to buy game devices), but instead permit live streaming of games over the internet directly to any number of consumer devices – from smart TVs and cellphones to dedicated in-home gateways, including legacy pay-TV operator set-top boxes. (Imagine opening the ‘Apps’ section on a Comcast X1 STB but instead of selecting Netflix to watch video you choose Epic Games to play Fortnite or other massive-world games on your TV, all without a console.)

Why it Matters
The implications of the shift to cloud gaming will be enormous, drive transformations in game consumption and creating new winners and losers in gaming, technology, and communications. Among the most significant implications of this shift are:

  • Changes in game industry business models – To the current dominant business models of pay-to-own and free-to-play will be added a Netflix-style game subscription service that, for a fixed monthly fee, will provide access to a wide range of console-quality streaming games across all of your screens.
  • New entrants in the gaming space – Charter’s announcement comes on the heels of others made earlier this year by Google, Microsoft, and Electronic Arts. I expect similar cloud gaming pronouncements in 2019 from several other big companies, including Amazon. Put simply, many companies that have to date not participated in non-casual gaming are now eyeing the space and will likely dominate just as they did in print, music, and video. PC- or console-quality gaming is just the latest media vertical for cloud-based technologies to subsume.
  • Delivering ‘Trojan horse’ smart-home hubs – The next generation of smart speakers (e.g., Facebook Portal, Google Home Hub) will look to do to video what Amazon Echo did to audio, and will be one more step forward in the tech giants’ battle to control the dominant smart-home hub service. The stakes are much higher than just games, but the attractiveness of a cloud-based gaming platform could provide a big competitive advantage to whichever company comes out on top.

Barriers and Challenges
These disruptions have the potential to create a major change in both industry leadership and consumer behavior, but the underlying shift is not a foregone conclusion. Several barriers threaten to subvert widespread adoption of cloud gaming.

From a technical standpoint, the biggest challenge is the problem of latency – the delay caused by the time required to send a signal from a user’s home to a cloud data center, process the data, and then return the signal to the user’s home. With a traditional in-home game system, all data processing is local (i.e., takes place on a high-powered console or PC), so latency is not a major issue. But for cloud-based streaming of games with super-fast action (such as fighting or shooting genres), latency can create an inferior experience. The ability of service providers to find solutions to latency will be crucial to success.

Another barrier to cloud gaming will be consumer inertia. Despite the intentions of technology and service providers, there remains a serious question as to whether hardcore PC/console gamers will desire a cloud-based experience, especially early on when its shortcomings will be on full display. Cloud gaming may be just be the latest case of “a solution looking for a problem.”

Conclusion
Just a few years ago, pundits were predicting that, by this point in time, Virtual Reality would be revolutionizing media consumption, with major companies including Facebook, Google, and Microsoft making big investments in the space. As TDG then argued, this predicted disruption will take years to manifest, leaving the future impact of VR’s impact on consumer video in question.

Similar uncertainty exists for cloud gaming, which has the potential to either change everything or possibly nothing at all. Monitoring early rollouts, the availability of quality content, and the pace of consumer adoption will be critical in forecasting success.

Stick with TDG and stay ahead of the curve.

Mike Fischer is a veteran of the video and gaming industries, having held executive positions at Microsoft, Amazon, Epic Games, and Square Enix. He is also a member of the faculty at the University of Southern California.

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