Cloud Computing – A Major Game Changer in Video Games

Game streaming services have been garnering much attention in video games recently. Gaikai, one of the leading companies in game streaming, announced in January 2012 a partnership with LG Electronics which will see Gaikai’s game streaming service integrated into future LG smart televisions, effectively bringing a near console level gaming experience to anyone with such a television and a fast internet connection. OnLive, in a similar move, reached an agreement with Google TV to become a standard feature of the Google TV platform, while potential announcements from other television manufacturers may follow in the near future.

So, what does the shift to game streaming mean for the video games industry?

Next generation consoles and game streaming

Both OnLive and Gaikai run game streaming services based on so-called cloud computing technology, representing a major shift in the way video games are played at home. Cloud computing allows video games to be rented for a specific time, as opposed to being bought. In addition, it does not require the user to have a physical CD or DVD copy of the game since the actual game software is hosted on remote data centres that perform all the computation.

The announcements from Onlive and Gaikai came at a very symbolic time, when the video games world was expecting Sony or Microsoft to say something about their next generation console plans. The current generation of video games consoles, released around 2005/2006, is approaching the end of its lifecycle, and the industry expects new consoles to be announced soon. However, with the pace of development in game streaming, the question is now whether all three console makers will release next generation consoles.

Video consoles are known to incur high R&D costs and a long and uncertain wait to reach profitability, essentially meaning that few companies can afford to take the risk of entering the business. Because of this, console market is heavily concentrated in the hands of Microsoft, Sony and Nintendo. Microsoft is the most recent entrant, after release of its Xbox console in 2001. Sega also used to make consoles but exited the hardware market in 2001 after running into financial difficulties with its Dreamcast console.

Moving from television ecosystem to the single smart television

Cloud computing opens the door to the highly concentrated video games hardware market to more players, and television is among the big potential winners of the trend. Streamed games can be played on most internet connected devices and television manufacturers stand in unique position to consolidate the ecosystem of products around the TV into a smart television, capable of streaming games/movies/music and other media. The global market size for televisions is large enough to absorb a large part of static games consoles market.

The backing of major television manufacturers would also allow cloud gaming providers to persuade more publishers to give video games to them. At the moment, major downside to game streaming is the limited number of games available on such services since major publishers like Electronic Arts or Activision Blizzard as of yet still do not make the games available to cloud services. However, with financial support of Samsung or SONY, it could all change.

Sales of Televisions Compared to Static Video Games Consoles

 
ScreenHunter_07 Jan. 24 17.44

Source: Euromonitor International (Consumer Electronics and Toys and Games)

High bandwidth requirements may leave emerging markets for console expansion

Another hurdle to the rapid adoption of game streaming is the high bandwidth levels required by such services. Playing OnLive, for instance, downloads about 2-3GB of data per hour, putting a major strain on internet connection. That may turn out to be an obstacle in some regions where internet connection is slow, meaning that static video games consoles based on physical media are not likely to be phased out anytime soon.

Average Consumer Download Speeds

(Selected countries, data for 30 days preceding January 17, 2012)

 

ScreenHunter_08 Jan. 24 17.45Source: netindex.com data based on speedtest.net results

In Latin America and developing Asia, for instance, superfast bandwidth is either too expensive or not readily available, prohibiting greater worldwide adoption of game streaming. Selling to these regions may become more important in the future to sustain growth of current or next generation consoles.

Other regions offer strong potential for cloud computing. Eastern Europe, for example, has very low console ownership rates, and now appears more likely to skip the console cycle entirely. The region in general has high internet connection speeds, making it an attractive area to target for game streaming services. In addition, game streaming solves the piracy issue which is highly prevalent in the region, and should be an attractive option for game publishers.