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Sony and Gaikai: The Cloud's Silver Lining

Sony and Gaikai: The Cloud's Silver Lining

Mon 02 Jul 2012 3:19pm GMT / 11:19am EDT / 8:19am PDT
BusinessPublishing

What has Sony bought for its $380 million, and what does it mean for its competitors?

Sony Computer Entertainment

Sony Computer Entertainment is a Japanese videogame company specialising in a variety of areas in the...

playstation.com

Sony's $380 million acquisition of cloud gaming platform Gaikai is big news, but it will surprise very few people within the industry. Rumours of the tie-up have been circulating since before E3, and many people expected it to be announced in Los Angeles last month; instead, somewhat unconvincing denials were trotted out, along with the news that Gaikai had struck a deal to build its technology into Samsung TVs. An acquisition deal was always inevitable, though, and it's taken less than a month after the show for one to materialise.

Why inevitable? Because that's what Gaikai was built for. There are start-up companies which are designed for the long haul, with a long-term business plan and perhaps even the chance of an IPO down the line, but Gaikai was not one of those companies. Rather, it fell into a second category - the sort of start-up which is designed to rise fast and far off the back of great technology and intense self-promotion, to garner as much attention as possible, and ultimately to be acquired by a larger firm as close to the top of the trajectory as possible. If it hits that target, everyone makes millions - think Instagram, or Draw Something. If it misses, though, it crashes back to earth with absolute finality, because there's no real business plan for the long term - no way to make money as a standalone enterprise.

"There's no question that cloud gaming companies today exist to be acquired. There's no real market for their products yet"

Gaikai's founders might deny belonging in that category (they would have yesterday; they might not today), and OnLive's certainly would, but there's no question but that cloud gaming companies today exist to be acquired. There's a simple reason for that - there's no real market for their products yet. There will be; everyone knows that. But right now, the technology platforms they're espousing are running ahead of market realities by a matter of years rather than months. The world isn't ready for cloud gaming, which means that standalone firm providing a cloud gaming platform to consumers has little chance of commercial survival - but platform holders have to start preparing for the day when the world's network infrastructure catches up with the potential of the technology, so the acquisition exit is wide open.

A number of obvious questions arise from the Sony/Gaikai deal. Some of them are strategic - what will Sony do with Gaikai and its technology? How will Microsoft react? What happens to OnLive now? Other questions are purely financial in nature, most specifically, was $380 million a reasonable price and what does it mean for the valuation of Gaikai's competitors?

From a strategic standpoint, there's an expectation in some quarters that streaming technology will eventually replace client-side gaming entirely, with Sony's Gaikai acquisition already being trumpeted as proof of this "inevitable" market movement. The reality in the short- to medium-term will be much less dramatic. PlayStation 4 is not about to become a $99 thin client for cloud gaming; it will be a powerful client-side gaming console with lots of storage for digitally distributed titles and a Blu-ray drive for boxed titles. It will also, however, use Gaikai technology, not to replace the existing functionality of game consoles but to supplement it.

What Gaikai promises, rather than an alternative path forward for high-end gaming, is a variety of new opportunities at the low- and mid-range of the market. It's a fantastic option for selling access to a back catalogue, for example, and should provide Sony with many new opportunities to monetise the impressive back catalogue of PlayStation, PS2, PSP and PS3 titles. Those opportunities are not merely technical (although this should, in theory, eliminate some of the barriers to making legacy titles available on new systems), but also commercial. Subscription business models or the ability to use back catalogue access as a sweetener for other subscription products are also opened up by Gaikai - and Sony has already demonstrated an affinity for that kind of proposition with PlayStation Plus, which makes an increasingly impressive library of software available to customers for the duration of their subscription.

Gaikai is also, as its founder Dave Perry has been keen to emphasise from the outset, a great marketing tool. As game demos have grown in size, now often clocking in at multiple gigabytes, they've become less and less appealing to consumers - many of whom, especially in the United States, face tough bandwidth caps from their ISPs. Streaming offers a chance to let players try a game instantly without the inconvenience of a large download. It's a lot less appealing for a full game (the visual quality and input lag will be worse, while streaming a full game would probably end up being more bandwidth-intensive than downloading the client) but perfectly suited to demos. Given Gaikai's low client-side requirements, I feel that Sony would be missing a trick if this functionality didn't appear on PS3, let alone PS4.

"Gaikai everywhere means PlayStation everywhere. Televisions, smartphones, laptops, tablets, consoles"

Yet talking solely about consoles actually misses out on the real potential offered by Gaikai. The fact is that this kind of streaming technology is part of the answer to a challenge which Sony has been trying to overcome for the best part of a decade. For years, Sony has wanted to sprinkle some of the PlayStation magic dust over the rest of its consumer electronics range, but its efforts have never quite worked out. From the PSX, an ill-fated set-top box integrating a hard disc video recorder and a PS2 console, through to the Xperia Play, an ill-fated Android smartphone which plays a horrendously limited selection of PSone software (and doesn't sync up to your existing compatible purchases from PSN, a stark demonstration of just how much work Sony still has to do on getting its right hand to even acknowledge the existence of the left, let alone talk to it), Sony has tried many times to make PlayStation's success rub off on the rest of the business, but it's never worked.

Gaikai holds part of the answer. It won't solve the hard problems that exist within Sony itself - the right hand and the left really need to be on cordial terms - but it will provide a technological platform that can deliver content where it's needed, regardless of platform. The vision is straightforward - Gaikai everywhere means PlayStation everywhere. Televisions, smartphones, laptops, tablets, consoles, all accessing PlayStation Network and streaming your content from the cloud, finally allowing that extraordinary 15 year history of software to become a proper selling point for everything Sony. In fact, if Sony is being really clever, it will even extend this access beyond its own devices - honouring end extending Gaikai's E3 deal with Samsung to create an ecosystem around PlayStation which is accessible even from phones and TVs that don't carry Sony's brand.

As to the long-term future, who's to say? Actually, plenty of people are saying plenty of things - but we have a bad habit, as an industry, of conflating technological possibilities with market trends. The question of whether network infrastructure will leapfrog advancements in client-end hardware is a fascinating one which is worthy of debate, but at present - as the price, power and capacity of consumer chipsets and storage continues to plummet at a much more reliable and smooth rate than the growth in network throughput - it's not a business reality. Cloud gaming is one possible future; for now, though, it's just one part of a wider picture, not a looming threat or logical certainty.

"EA and Activision could be in the market, with OnLive being a better fit for EA's digital strategy, although EA's depressed share price makes a cash-and-stock deal harder to negotiate"

In terms of the second set of questions, regarding valuation, that's tough to answer simply because the valuation of a firm like this is largely in the eye of the beholder. Gaikai reportedly wanted half a billion; $380 million is a reasonable fraction of that, especially given that for the company to keep going for much longer would have required a significant new round of investment, seriously diluting the proceeds of an eventual sale. Gaikai is likely to be happy with the money it's received, while Sony won't consider itself to have overpaid, although talk of this being a "bargain" is also misplaced.

It does also pitch an interesting price point for OnLive, whose bosses would be hoping for a much larger price tag - given their high-profile consumer business, dedicated client hardware and so on - but may find themselves settling for less simply because their consumer business isn't actually that interesting to buyers who already own platforms, while the Gaikai/Sony deal takes Sony, one of the most likely bidders to drive the price up, off the market. Microsoft are probably interested - although they have some cloud services of their own they're a radically different technological proposition from cloud gaming - but would consider OnLive's consumer business an unwanted distraction. EA and Activision could be in the market, with OnLive being a better fit for EA's digital strategy, although EA's depressed share price makes a cash-and-stock deal harder to negotiate. I'd be surprised, though, if a deal isn't forthcoming before the end of the year. The early movers in cloud gaming are at the peak of their trajectory; the time has come to cash out.

14 Comments

robert troughton
Managing Director

219 92 0.4
One thing that people keep forgetting about Gaikai is the technology that Gaikai have made for encoding and transmitting video. What if the PS4 isn't just a client ... so, essentially, you play a game on your PS4 and the PS4 can encode the video stream from this and send it to any of your devices - your Vita, tablet, iPhone, whatever. And those devices can in turn communicate back with your PS4 to control the game.

I think this is going to be a big part of the next generation for both Microsoft and Sony.

Posted:2 years ago

#1

Rick Lopez
Illustrator, Graphic Designer

1,269 941 0.7
Well it would be nice to stream games from my console to any where in the world. I would put my money there. At least the content is mine to begin with. but when video games start becoming like TV channels and I just flip through to play different games, ill probably stop playing games. Cause, even with cable TV and netflix, i like having my copy of a movie. Same with games and music.

Posted:2 years ago

#2

Brian Smith
Artist

195 84 0.4
This technology is valued at the moment but isn't everyone and their dog going to be spitting it out in various flavours over the next few years. I for one am surprised that Sony would jump in feet first and that surprise will be doubly so if they aren't going to employ it on PS3. Surely if it was for next gen they'd have done their own or bought something later. This could turn out a big bunch of nothing in terms of value for money for them.

Posted:2 years ago

#3

Tim Carter
Designer - Writer - Producer

554 271 0.5
Yes, because as we all know, it's just so difficult these days to download a movie.

Edited 1 times. Last edit by Tim Carter on 2nd July 2012 5:00pm

Posted:2 years ago

#4

Nicholas Pantazis
Senior Editor

1,017 1,463 1.4
I see them using this for Playstation Mobile, to stream PS3 games to their tablets and smart phones.

Posted:2 years ago

#5
I guess to build a formidable platform like stem, one has to start somewhere. Sony looks to have almost all the different jigsaw components to establish a strong mid to long term transition.

Posted:2 years ago

#6

Craig Bamford
Writer/Consultant

40 54 1.4
I'm not seeing how this works, or why Fahey's so confident that OnLive will be bought out. By who?

EA and Activision are both dubious takeover partners. EA's stock price has been dropping pretty dramatically of late, and Activision is in serious danger of doing the same if they see a decline of either Blizzard or the omni-exploited Call of Duty franchise. These things are normally paid for in stock options; why would OnLive take stock that's likely to trend downward?

Besides, this doesn't strike me as the sort of technology that attracts buyouts from game publishers. It's the sort of thing that attracts platform-holders like Sony.

But other than Microsoft, who's left of the existing platform-owners? Neither Apple nor Nintendo are going to be interested. They aren't going to be too chuffed about tech that frees you from being on a particular platform, considering both depend on hardware margins. Samsung and Sony are both integrating Gaikai into their hardware ecosystems, albeit in different ways, so OnLive doesn't fit in there either.

The only platform-owner I can possibly think of as being a sensible takeover partner is Valve. But if Valve aren't interested, why wouldn't OnLive continue? Fahey's blithe dismissal aside, they do have a consumer business: one using a straightforward model.

And since broadband penetration is likely to be moving up, not down, I'm not seeing how OnLive is supposed to be at their "peak", either. Comparisons to Draw Something are just plain wrong; Draw Something was a fad. OnLive is a real business whose value is likely to increase over time, not decrease. Considering the state of all their potential partners, it might well be wiser for them to wait.

Sure, they might not get their tech into the next generation of consoles. But the whole point of their tech is to make those consoles obsolete.

Posted:2 years ago

#7

Taylan Kay
Game Desginer

59 93 1.6
I agree with Craig: OnLive has a shot at going it alone, whereas Gaikai never bothered to offer a full game streaming service with any kind of business model.

The catalogue of games on OnLive leaves something to be desired but it has been improving lately. I was amazed recently how well Batman Arkham games played on the service, and was quite happy to see the recent Civ5 expansion on there as well. It is not to replace console or PC gaming anytime soon, but it certainly saves me the trouble of spending $500+ to upgrade my system for a few games I'd like to play, which is terrific value from where I'm standing.

That said, I have no idea if they actually have positive cash flows (or are anywhere near that) at the moment. They have a clear market with upgrade-weary gamers like myself but I have no idea if that market is large enough to sustain them in the long run.

Posted:2 years ago

#8

Richard Gardner
Artist

123 32 0.3
I think the article hit the nail on the head when talking about a vision for Playstation's catalogue of software across multiple devices. Also its a power tool to allow your consumers to play a demo instantly. The industry is moving towards digital distribution, but people still need to be enticed into impulse buys.

Its such a fantastic feature for the box as well "allows you to play all PS1, 2, 3 and 4 titles"

Lets not forget that Sony also purchased Ericsson. Imagine if Sony was to release a budget handset with controller functionality that could play console titles at a remarkably low price?

Then there is the power of subscriptions, if Sony was to treat there back catalogue much like Netflix with there flagship titles as general purchases.

The possibility's are endless, lets just Sony turn it around and do something right for once.

Then again, mobile and many parts of the world suffer from network limitations. But I'm sure this will only get better in the years ahead.

Posted:2 years ago

#9

Nick Parker
Consultant

279 143 0.5
Sony and Panasonic announced last month to go into partnership to build OLED TVs in order to take on the Koreans, Samsung and LG. Both Samsung and LG had done deals with Gaikai. Sony has bought Gaikai but I'm not sure that I follow Robs optimism in saying Sony will continue in "honouring end extending Gaikai's E3 deal with Samsung". Sony may wish to but I'm not sure the Koreans will be so receptive.

With regard to OnLive; its just too expensive with it's capital tied up in server infrastructure and patents to get a return. Also, I prefer the b2b model (like Gaikai) rather than the OnLive b2c model. There are smaller streaming technology solutions which would be more attractive; Onlive and Gaikai are not the only players in this sector.

Edited 1 times. Last edit by Nick Parker on 3rd July 2012 8:42am

Posted:2 years ago

#10

Dave Herod
Senior Programmer

517 734 1.4
When it comes to download limits from ISPs, I'm not sure streaming helps at all. At least if I'm downloading a demo I can see before I start how big it's going to be and budget for it. If I stream, there's no upper limit how much bandwidth I can chew through and sometimes no easy way to measure it. Considering some ISPs don't just cut you off, but start charging you extortionate fees for exceeding your limit, I'd be far too paranoid to use streaming if I had a download cap. Even "unlimited" deals usually come with a "fair use" policy meaning that if you have fairly heavy bandwidth use the ISP will throttle your connection and suddenly the game quality degrades. Streaming games will only appeal to me once I've got a 99% reliable connection, no contention, high bandwidth and no limits. Something I don't see happening for a long time.

Posted:2 years ago

#11
@robert troughton: That's a lovely idea- but it depends on people having fast enough uplinks from their console to handle 2Mbps solidly. I believe that's beyond ADSL so it depends on lots of fibre around... globally that's quite a lot of years away from mass market.

Edited 1 times. Last edit by Ed French on 3rd July 2012 1:35pm

Posted:2 years ago

#12
@Richard Gardner: Emulating PS2, or PS3 games in the cloud could make some sense for a new PS4, but it's worth noting that most pundits are predicting that the PS4 will have a PC-esque x86 type architecture. That means that building a robust emulator for those games to run them in the cloud, is the same task as building them to run on the PS4 locally- so why should Sony want to spend money on servers when you have the same resources sitting in front of you?

Posted:2 years ago

#13

Richard Gardner
Artist

123 32 0.3
You make a great point Ed, I didn't think of that. One thing to possibly think about though is right now cloud technology is fairly primitive. In the years to come imagine a server that loads a game into memory only once, but then is accessed by multiple CPU's all running different games independently. Why load your characters into memory on every single machine when you only need it available on one. This is just a simple example of how cloud technology might evolve. There is a lot of technology and understanding still to do with the cloud but the concept of breaking down a game and running multiple independent versions of it on a single server has a lot of room for optimisation.

I would assume a lot of this would need a game to be built for the cloud... not sure if it would be as simple as throwing anything on it.

Buts its definitely food for thought.

Edited 1 times. Last edit by Richard Gardner on 3rd July 2012 7:21pm

Posted:2 years ago

#14

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