June 11, 2019

Microsoft and Google Up the Ante in Cloud Gaming Battle for Smart Home Dominance

Both Google and Microsoft jump-started the Electronic Entertainment Expo (E3) with pre-show announcements for their respective cloud-gaming services. Google was first out of the gate with a June 6 YouTube video press release, in which it announced pricing models, new content, and additional technical details. Microsoft followed with a live briefing on June 10, which included more detail on its own products and services.

All this before the official start of the E3 show on June 11.

Missing in action was current game-console market leader Sony, which for the first time in its history is not participating in the E3 show. Sony announced in May that, in addition to a new Playstation 5 console introduction in 2020, it would be partnering with Microsoft to deliver its own cloud gaming streaming services via Microsoft’s Azure platform. This is not unlike how Netflix delivers its movie streaming service via Amazon’s AWS, which competes with its own Amazon Prime Video service. This move will result in both companies competing via content while they collaborate on infrastructure. Nintendo also has been quiet on this front, although there have also been published rumors of a Nintendo-Microsoft collaboration.

Remarkably silent is Amazon, who is expected to join in the gaming platform space. There is still no indication of when (or if) an announcement is due. Amazon’s AWS business is still a leading backend service provider to many game companies, and Amazon continues to promote (with little traction) its Lumberyard suite of game development middleware tools. It’s also worth noting that game publisher Electronic Arts founder Bing Gordon is on the board of directors of Amazon (and was seen on the show floor during March’s Game Developers Conference). Nevertheless, Amazon had no prominent public presence at E3, just a few semi-private industry gatherings.

Google: Revolutionary technology with conventional business models
As expected, Google unveiled a robust lineup of more than 30 games for its new Stadia cloud-streaming game service, along with a list of publisher partners that covers a wide swath of the industry’s major players. Interestingly, Google did not offer a “Netflix of gaming” subscription service. Instead, it offered a monthly $9.99 “Stadia Pro” service, which delivers higher audio-visual quality than the standard “Stadia Base.” Stadia Pro will launch in November 2019, with the free Stadia Base service rolling out in 2020. Google did tease that the Stadia Pro service will offer “additional free games released regularly” beginning with Destiny 2, but it was positioned as bonus content, not access to a large library of games.

The core consumer experience will be akin to buying an Amazon Kindle digital book — getting unlimited access to digital content for the purchase price of the game. Individual game subscriptions offered by publishers, as well as micro-transactions and other digital content will also be supported.

The absence of a subscription business is likely driven by the lack of a back-catalog of older titles that can fill out a portfolio offering. Most games are built on the Windows platform, but Stadia is built on Linux. This, along with some other technical specifications, means that old games can’t simply be added to the Stadia library the way music or movies can. Every piece of content needs to be individually converted and tested — an expensive and laborious process unless an automated system can be developed.

Google says the biggest value prop for Stadia is simply that consumers can get the highest-quality games without having to invest in any gaming device — removing the high initial cost of ownership (and trial) from buying a game console or high-end gaming PC.  With no cost to sign up for a free trial (should it choose to offer one), Google Stadia makes it very easy for customers to switch services at any time.

Microsoft:  Big bet on cloud and subscriptions, but with a traditional console, too
Microsoft held its traditional press briefing at the Microsoft theater, just a short walk from the Los Angeles Convention Center where the E3 show takes place. There the company showed off a broad range of exclusive content — the result of acquiring six new game studios in 2018 and founding a seventh. In addition, it announced another studio acquisition at its briefing: the beloved and respected publisher Double-Fine Productions.

Microsoft continues to add top-quality and new games to its existing Games Pass subscription service, and is very explicit to partners that this subscription business is its biggest initiative. A two-tier pricing service offers access to a console library of over a hundred games for $9.99, as well as a premium service for $14.99 that enables online game play as well as access to a PC games library. These services are available now as a download-to-play service, but will be added as a cloud streaming service beginning this October.

The Game Pass service functions as a strategic bridge across Microsoft’s current console, its next-generation “Project Scarlett” console (due in 2020), and its own cloud streaming service, called “Xcloud.”  The new Xcloud service will at first be limited to operating on Xbox One consoles, but in 2020 will evolve into a device-free service similar to Stadia.

The big unanswered question is how Microsoft will align its device-free service with its console business. At a press briefing, Microsoft positioned the current Xbox One hardware as functioning like “an Xcloud server in your home,” implying that Xcloud would initially still rely on the processing power of a home server, unlike Google’s service, which is entirely powered by Google’s cloud data centers.

The dilemma for Microsoft is that if the Xcloud service is too good it will negate the need to own a console, thus obsoleting its core business. On the other hand, offering too limited a service will not allow it to compete effectively with Stadia. How Microsoft intends to manage this balancing act remains to be seen.

The stakes are much higher than just games
Google has a lot to gain by making inroads into the gaming space, and it’s about much more than games.  It’s about getting a foothold in the smart home of the future and the added-value services that can then be offered. For example, according to new TDG research in early 2019, Amazon’s Echo is used by seven-in-ten US smart speaker users, three times the rate of Google Home. The fact that the Stadia game controller comes equipped with a microphone that performs the functions of a Google phone, Stadia has the potential to help Google Home grow share in this hot product/service category. Google’s gaming service is also deeply integrated into YouTube, which can help Google compete in the premium video space where it trails both Amazon and Netflix.

For its part, Amazon has the ability to build more market-dominating momentum for Amazon Prime if it rolls games into existing offerings for streaming video and music, or adds an “Alexa for Games” device.  PlayStation and Microsoft, on the other hand, largely see cloud gaming as a way to defend their existing market positions.

Conclusion:  Disruption and opportunity, with content providers the short-term winners
The entrance of a new player (Google), the introduction of an all-new cloud technology to replace game consoles, and the emergence of new business models such as subscription gaming and free-to-play add up to the biggest disruption since Apple’s introduction of the iPhone. It’s impossible to predict the ultimate winner, but in the short term, companies with strong IP or game development capabilities will enjoy a windfall as the tech giants bid against each other for access to their game content.

Consumers also face a wealth of new offerings and freedom of choice. In the past, the decision to buy a game console effectively locked players into a single ecosystem, with few people wanting to buy multiple devices. But in a device-agnostic world, the cost of switching will be zero, and players can expect to manage multiple services at any given time, depending on who offers the game they want to play.

There are major implications for non-gaming media companies, as well. It is relatively easy for a gaming service to bundle music, video, or other added-value services with games. But even the largest media conglomerates would be challenged to add a gaming service to their own video or music offering. Thus the threat of the tech giants further encroaching on traditional media companies should be keeping Hollywood up at night.

 

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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