Cloud gaming is being sold as the next stage of video game innovation, but consumers will have the last word
Sam Naji and Damian Abrahams break down the barriers streaming services must overcome to reach a larger audience
The Xbox Series S gets filled up pretty quickly. Pondering which game to delete in order to make space for a new one isn't a nice problem to have. Even on a relatively fast wireless broadband connection a typical game on Game Pass can take over an hour to download.
However, a cloud option on numerous games is becoming the norm on the Ultimate tier. Not only does this overcome the storage issue, but it is also a great option to try games like the demos of days gone by.
Game Pass Ultimate currently classifies its cloud service as "beta." Until the service is more polished with faster internet speeds and stronger connection stability, multiplayer and esports won't be the default experience on the cloud any time soon. So, although it seems the broad trend is towards cloud gaming there are numerous barriers that need to be addressed first.
Let's explore some of these issues.
A growing cloud, the theory.
Whereas competitive gamers may invest heavily in hardware such as a high-end Nvidia GeForce RTX 3080 graphics card to boost performance and future-proof their tech, it is reasonable to assume the casual gamer may not have the financial means or inclination to buy the latest dedicated video game console -- let alone finance a library of expensive new games.
The desire to tap into the casual market but with all accoutrements of a high-end gaming machine was the business case for Stadia. All the grunt work done by an expensive console would be done remotely on servers and high-level fidelity graphics would be subsequently streamed to the end user. With pandemic-induced supply chain issues, the inability to buy new consoles due to the high level of demand, and the ubiquitous availability of app devices, you would think this would have been fertile ground for cloud-based gaming to grow, but things did not turn out the way that way.
Cloud gaming has yet to replace conventional console or PC-based gaming. It has instead become complementary to traditional disc-buying or full-game DLC purchases. So, something seems to be amiss. Why the hesitancy to adopt cloud gaming as the primary source of video game consumption?
According to research firm Omdia, revenues derived from cloud gaming is set to reach $12 billion by 2026, resulting in cloud gaming accounting for just 6% share of consumer spending on video games. The problem for cloud gaming is that growth will depend upon many factors which currently prevent the sector in attaining a higher share of revenue. Subscription offerings which offer downloadable games, free-to-play games, microtransactions and advertising-led models will all fight for consumer wallets. This is on top of the fact the vast majority of gamers still prefer to buy games.
Cloud gaming growth will also be clipped by technology challenges involving network speeds, capped data tariffs and latency. On a positive note, cloud gaming is seen by network providers as a useful way to drive adoption of faster fibre broadband and 5G mobile technologies.
Need for speed
Achieving a fast internet doesn't come cheap. Firstly, there's upgrading from copper or fibre-optic cabling. Smaller countries will find this cheaper to do. Then there are technologically savvy countries like South Korea which invest heavily in national rollouts.
What also helps is that many countries with a maritime border are connected to several undersea fibre-optic cables. These submarine cables carry virtually all communication data. Companies are also getting in on the act. Amazon, Microsoft and Google reportedly own 63,605 miles of submarine cable to meet burgeoning demand for their cloud data services, according to data visualisation specialist Visual Capitalist.
Services like Stadia, Luna and Shadow have been hamstrung by technology constraints or business models that fall short of consumer expectations
In 2018, 50% of the world had access to the internet. By 2023 it will be 66%, or 5.3 billion people, according to research from Cisco, a networking giant. Three-quarters of these people will be consumers as opposed to businesses and nearly half will be accessing the internet through a mobile connection. The global average mobile speed is set to treble from 13.2 Mbps in 2018 to 43.9 Mbps in 2023, while the fixed broadband speed is forecast to double from 45.9 Mbps to 110.4 Mbps during the same period.
But 5G is where the more striking development is happening. 5G connections will be over 10% of global mobile connections by 2023. In other words, 1.4 billion of those mobile connections will be 5G-capable, enabling smooth cloud-based gaming on expected average speeds of 575 Mbps.
To have an idea of the future, multiplayer mobile gaming is best experienced in South Korea, according to Opensignal, a mobile analytics company. It's unsurprising given South Korea's strong gaming culture, producing numerous esports superstars in console and PC games like League of Legends.
It's not just rich Asian countries where faster 5G speeds is driving a better gaming experience. The Philippines has benefited the most from the transition from 4G to 5G technology. The improved mobile gaming experience may boost the growing popularity of play-to-earn market where players have tried to play their way out of economic hardship, a trend that is also gaining traction in South America.
It's not just fixed broadband and 5G which can help expand access to the internet. Typically not as fast as 5G but with low latency, satellite internet has the potential to connect the most remote areas which are not covered by traditional earth-bound infrastructure. Elon Musk's Starlink project -- which develops a low latency, broadband internet system to meet the needs of consumers across the globe -- could be one avenue by which cloud gaming could become accessible.
In sum, the world will be more connected than ever before. And with this connectivity will come vast pressure on infrastructure to keep up with the pace of data growth.
Betting on infrastructure
It was telling when Bobby Kotick, CEO of Activision Blizzard, referred to the key motivation for the transaction of his company with Microsoft, the biggest acquisition in video game history, is a "cloud that is purpose-built" for gaming communities who live in a virtual world via any connected device.
To scale successfully this decade will require a cloud solution of sorts. Investors know it. Of all the so-called FAANG stocks (Meta (Facebook), Amazon, Apple, Netflix, Alphabet (Google)) the stock market has handsomely rewarded the big three cloud service providers Amazon, Microsoft and Google whose cloud divisions offer solid forward guidance for at least the first quarter of 2022 following robust revenue performance throughout the pandemic.
It would not be hard to imagine that Microsoft will benefit with stellar franchises Call of Duty, World of Warcraft and Candy Crush from Activision Blizzard, in turn swelling subscription revenues and making efficient use of its cloud infrastructure investment, beyond its corporate-orientated Azure cloud platform. Currently all three franchises now have a mobile-based element. By building brand awareness it could look to synergize these mobile gamers into console gamers via a cloud-based offering.
For instance, mobile gaming revenue was bigger than console and PC business combined in 2021, according to the Financial Times. Call of Duty Mobile has already been a huge success in China, so the wider adoption of 5G and cloud services is an enticing prospect.
If the acquisition is approved by regulators Microsoft will have a roughly 15% market share in gaming, according to The Economist, indicating competition will remain relatively healthy for the foreseeable future.
Such fierce competition can be illustrated by the $178 billion cloud infrastructure market in 2021. Amazon's Amazon Web Services (AWS) carved out a third of the market with a plump 30% operating margin, Microsoft's Azure captured a fifth, Google's Google Cloud a tenth, and Tencent's Tencent Cloud a modest 3% share.
All these companies and more -- such as Sony, Nvidia, Netflix, Apple and Meta -- will have a say on the success or otherwise of cloud gaming as they take huge bets on where the best technology growth markets of tomorrow may come from.
So, the ability to turn all this infrastructure into viable cloud-based gaming will not be too costly as the upfront investment has already been realised. The bigger question for publishers and content providers is whether Western video game markets will embrace cloud-based gaming as an alternative to traditional physical based or digital download based gaming?
The trifecta holy grail
The video game industry today has many competing revenue streams but ultimately it is content that fuels revenue. The success of Game Pass which today has over 25 million subscribers (an increase of seven million subscribers in the last year alone) is evident that content which inspires gamers will gain traction among consumers.
That seems to be Microsoft's Xbox pitch, it is building an ecosystem that is trifecta of "content, community and cloud." Other companies have taken note of this approach and will want to beef up all three to have the best chance of capturing and engaging the biggest audience. It is not a coincidence that Sony is now reportedly rebranding its PlayStation Plus subscription to meet this new reality.
Gamers still prefer to own a dedicated machine and games. When that changes cloud gaming could have a strong future
Another example is the vision Mark Zuckerberg has for Meta. There are 300 million Meta (formerly Facebook) gamers that stem from Meta's social roots. They're likely to opt for streaming games rather than downloading apps to interact with the platform. Owning an expensive console or high-end PC may not appeal to these types of casual gamers who would rather opt for convenience than ownership.
Back to the present, other cloud gaming streaming services like Google Stadia, Amazon Luna and Shadow are experiencing mixed success, often hamstrung by existing technology constraints or business models that fall short of consumer expectations.
Nvidia's GeForce Now may be best positioned to fulfil the hardware part of the trifecta maxim, if not content and community. Nvidia's graphic processing units dominate gaming hardware across the globe, most notably in PCs. Nvidia's PC streaming service -- and recently on M1 MacBooks -- with a library of around 2,000 titles is powered by tens of data centres. Although GeForce Now's premium RTX 3080 cloud streaming service can't quite match a local hardware set up, the relatively cheap subscription seems to be making great strides in closing the gap in terms of video compression, streaming and lag. In comparison tests, it outperforms Xbox Cloud Gaming and Google Stadia on virtually every metric and is a "technological marvel," according to Digital Foundry.
In the last several years, these technology powerhouses are all investing in faster and better cloud-based gaming solutions, but the issue going forward will be less on the technical aspect and more on the business proposal. This was a lesson Microsoft understood very well with its subscription service Game Pass, Google less so with Stadia.
Those who follow gaming news these last 20 years have seen similar predictions that new technologies will disrupt sales and become the future of game revenue. There was great anticipation that the release of the Kinect, peripheral gaming, 3D gaming, social gaming, Toys-To-Life and VR will be the catalyst that "changes everything." They didn't. What these technologies failed to address is that although they offered something new, they were never going to replace the tried and tested success of traditional console and PC gaming.
The fact that sales for the Switch, PS5 and Xbox Series consoles have been some of the best hardware results for Nintendo, PlayStation and Microsoft respectively is a signal that gamers still prefer to own a console that resides under their living room TV. Even "gaming on the go" threatens the viable future of cloud-based gaming as an alternative to owing hardware; pre-orders for the Steam Deck exceeded Valve's expectations and Nintendo consumer research found that Switch gamers preferred to play games undocked anyway.
This ultimately is cloud-based gaming biggest barrier in revenue growth: gamers today still prefer to own a dedicated gaming machine and following from that logic, gamers still prefer to own physical or downloaded games. When that changes cloud gaming could have a strong future, but as it stands, that future is less assured.
The adage that "consumer is king" still holds true. It will be gamers who will dictate the success of cloud-based gaming based on how they want to consume gaming, more so than the technological solutions that cloud gaming offers.