Playing in the cloud

Is cloud gaming a harbinger of the future of consumer computing?

Shadow on a Macbook Air.

Part 1: Industry competition

It’s an interesting time for cloud gaming right now because it’s still the early days, and the dominant business model has yet to be determined. Let’s compare 4 different services as an illustrative example: Shadow, GeForce Now, Google Stadia and Playstation Now:

• Shadow: “PC-as-a-service.” You get a full Windows PC, and can do whatever you want with it. You can obtain/install/play/mod anything you want, which means you can access the games you already own on Steam, Epic, or anything else. This is the full PC gaming experience. Different pricing tiers are offered, with more compute resources and storage at higher tiers.
• GeForce Now: “Limited-PC-gaming-as-a-service.” Similar to Shadow, you can play the games you already own — but you can only play games (no other pc functions are accessible), you have to own them on Steam, and only certain games are supported. You cannot access the operating system or install or mod anything. This is a limited version of the PC gaming experience. There is a free tier that limits you to 1 hour sessions, and a paid tier.
• Google Stadia: “Console-as-a-service.” You can only play games that are offered on the Stadia platform, and you have to buy/re-buy the Stadia versions to play them. This is the console gaming experience. There are 2 tiers of subscription and also hardware packages that include controllers and a chromecast for TV streaming.
• Playstation Now: “Games-as-a-service.” For $10 or less a month, you can subscribe to access a library of PS4, PS3, and PS2 games, playable on your PC or your PS4. There are over 800 games included, which are ever changing. This is the Netflix experience for games.

This comparison reveals the 3 key battles about to be fought in this industry:

(1) The Platform War

The platform wars of yesterday were fought between hardware makers (ie: Switch, Xbox, Playstation, etc). Companies competed to get their consoles into customers’ homes, so that they could later take cuts from game sales. Often, these companies also ran first-party development studios which created platform exclusives (think Mario and Nintendo). Companies won customers based on (1) price (2) hardware features (3) games library, and (4) extra utility (think PS2’s DVD player). Customers paid for consoles once, and bought games once. There were also at least 2 types of network effects:

• Personal network effects: people want to buy the consoles their friends are buying.
• Platform network effects: developers want to make games for consoles with lots of players, and players want consoles with lots of high quality games. Having a large player base also gives leverage for negotiating exclusivity deals.

The cloud-based platform wars of tomorrow could look very different for the following reasons:

• Customers won’t be as locked onto platforms anymore, because they can subscribe/unsubscribe anytime to one or multiple services, with low switching costs. Cloud gaming platform companies will have to continually compete to retain subscribers.
• Hardware differences between platforms may diminish as games all start to run on virtual machines in the cloud.
• Shifting business models could incentivize game developers and publishers to move away from platform-exclusive titles as they seek to maximize recurring revenue from micro-transactions and other ongoing fees by building the largest player base possible. The more this happens, the less differentiated the game libraries of competing platforms become.
• The rise of cross-platform-multiplayer-compatibility in games reduces the network effect enjoyed by individual platforms.

All these factors point to a future where cloud gaming platforms could start to become less differentiated, which would force platforms to compete on cost leadership rather than value creation. To prevent this, platforms may be incentivized to fight this trend and invest far more than the industry does today into securing exclusive titles and closing off multiplayer ecosystems.

The personal and platform network effects persist, but a new one is introduced with cloud gaming: physical network effects, where data center infrastructure will be a competitive advantage for Platform incumbents, and a barrier to entry for new competitors. Platforms with larger numbers of customers will be able to operate a larger network of data centers, and having a data center closer to a customer means lower latency — which is absolutely critical for cloud gaming. In the cloud gaming future, Platforms will be able to directly offer customers free trials in their homes, and all else being equal, customers will choose the ones that give them the best streaming quality.

Organizational capabilities will move away from hardware, towards cloud services and relationship management with game developers and customers. The Platforms that win will do so by competing on (1) price (2) streaming performance (3) exclusives, (4) branding (ie association with streamers/esports), and (5) personal, platform, and physical network effects.

(2) The Channel War

Related but separate from Platforms, are the Channels through which games are delivered to customers.

Today, console companies (Xbox, Playstation, Switch) are working to cut out retailers (Gamestop)with digital game sales. On the PC side, Steam is the dominant digital game sales player, raking in 20–30% of every game sale, while competitors (like Epic) are viciously fighting for their piece of the pie, literally giving out free games nonstop to build their install base.

In the cloud-gaming-future, Platforms and Channels will inevitably merge:

• New cloud platforms (such as Google Stadia) will want to also become channels and fight to cut out existing channels (such as Steam).
• Existing digital PC game channels (such as Steam or Epic) will probably eventually need to partner with “PC-as-a-service” providers because they will need to fight to maintain/grow PC-based gaming market share (vs. other platforms).
• Existing console makers will fight to maintain their platform market share AND channel market share — Sony is already laying the groundwork for this with Playstation Now and Microsoft is laying the groundwork with Project xCloud.

The Channel War will become one and the same with the Platform War — the same entities that win revenues by providing a Platform will leverage that customer relationship to take a cut of game transactions.

(3) The Revenue Model War

The third piece is revenue model — how will games generate income? Some ways I’ve seen games monetized include:

• Game purchases (either upfront cost or subscription for access)
• In-game transactions (selling services or products in game)
• Advertising deals
• Selling user data
• Merchandising
• Licensing rights
• Corporate sponsorships (think in-game events, esports, etc)
• Partnerships (with streamers, youtubers, companies, etc)
• Taking cuts of sales from in-game player-to-player marketplaces for digital goods (a platform-model business inside a virtual world)
• Education (selling courses or personal instruction on how to play games well, especially esports)

The dominant model will be built by the companies that are most able to (1) effectively segment their player base and (2) deliver up-sell campaigns tailored for each segment. These segments can be generated by data gathered directly from player behavior, and also from leveraging people-based-marketing profiles from data providers such as M1. These services provide person-by-person data on demographics, income, cultural indicators, relevant affinities, psychographic profiles, decision-making profiles, media consumption behaviors, and more. Platforms, Channels, and Game Developers will all have opportunities to leverage this information, and their player relationships, in order to up-sell and create the (1) high Lifetime Value, (2) low Customer Acquisition Cost, and (3) low Churn formula that produces consistent recurring revenue. The organizational capabilities needed to do this lay in Product and Marketing teams.

And finally, for every single one of those revenue streams above, there will be an associated revenue split agreement between all parties including but not limited to the developer/publisher, the platform and the channel. Right now, game developers and publishers are not yet sure how to protect their earnings with these new revenue models, which is why services like GeForce Now are struggling to build their game libraries. Platforms/Channels with the best organizational Partnership capabilities will have an advantage in securing win-win arrangements.

Part 2: Consumer Preferences

Will consumers accept cloud gaming as a substitute for owning “on premise” gaming hardware? A strong argument for “yes” is how cloud gaming changes the pricing structure for consumers.

Cloud gaming lowers the initial cost-of-entry to AAA gaming experiences to unprecedentedly low levels

Typically, building a gaming pc requires an upfront cost of at least $700, and buying a new console will run you around $300. In contrast, a Shadow cloud PC costs $15/month. The upshot: Cloud gaming is the cheapest way to get started playing AAA games.

In fact, there is a great example of this in the gaming world today: if you want to play the recently released game Half Life Alyx in VR, the cheapest — and arguably the best— way to experience it is by leverage cloud gaming.

Without cloud gaming, you would need to purchase a desktop wired VR headset ($400-$1000) and a VR-capable gaming PC ($1000), and you’d be left playing Half Life Alyx while wired to your gaming pc.

However, with cloud gaming, there is a way to get a similar experience except cheaper — and fully wireless. Using a piece of software called Virtual Desktop ($19) in combination with Shadow ($15/month) and an Oculus Quest ($400), you can stream AAA VR games from your cloud PC directly to your quest. While this solution is not an official one, its the one I personally used to play the game, and I have to say the experience was phenomenal and it shows the potential of this type of solution. In fact, Shadow is already working on an official Shadow VR app for the quest.

So what would you choose? Spend $1400-$2000 to play Half Life Alyx with wires? Or spend $440 to play it completely wirelessly? This is the value proposition of cloud gaming.

The 20ft x 30ft boundary space within which I played Half Life Alyx on my Oculus Quest, without wires, entirely streamed from my Shadow Cloud PC, all for a total cost of under $500.

When it comes to VR, Facebook will probably pursue a cloud gaming strategy with future versions of the Quest

With the Oculus Quest, Facebook has shown that is is betting on the convenience, simplicity, and experience of a wireless, all-in-one solution for getting the masses to adopt VR. The constraint of such a design is the limitations on computing power that the Quest can have while (1) staying compact and (2) staying relatively affordable. The primary competitive disadvantage of the Quest compared to other VR headsets today is its inability to play AAA games because of its limited power.

I suspect that at some point in the future, Facebook will decide that the solution to this problem will be cloud computing (and the recurring revenue benefits of a SAAS pricing model) instead of attempting to cram increasingly powerful mobile processors into headsets.

When Facebook does make this decision, it will have a strong competitive advantages to enable it to successfully integrate forward into providing cloud gaming services because (1) as the seller of the platform hardware, it initially owns the user relationship and can direct customers to the Facebook cloud gaming offering by default, and (2) as the operator of its closed Oculus store ecosystem, it can deny competitors (like Virtual Desktop or Shadow) from officially offering their programs in the store.

Using such a strategy, Facebook can offer the best of both worlds in the future: an “offline mode” that offers the Quest experience as it exists today, and an “online mode” that allows users who are connected to the internet to leverage powerful computers in the cloud to stream AAA quality games and experiences.

And finally, this “online mode” can also likely be backwards compatible with past versions of the quest (ie today’s versions of the quest), which immediately gives Facebook a large customer base to sell this cloud gaming product to, and generate new recurring revenue from, when they are finally ready to launch.

The primary barrier to adoption is connectivity, but that problem will be solved for increasing numbers of consumers as time goes on

The biggest problems consumers might face would be:

• Latency (which is dependent on connection speed): Inevitably, there will be more input lag than if you were gaming locally. Image quality may also have to be decreased if bandwidth isn’t available. However, in my experience, on a fast connection games are perfectly playable, even FPS games.
• No internet, no access: Your ability to game is at the mercy of your internet connection.

But for the majority of consumers, I suspect the sheer cost advantage of cloud gaming will make them willing to pay for the service despite the potential drawbacks, especially for a non-essential use like entertainment.

The future of personal cloud computing: computer-as-a-service?

In the same way that cloud gaming may try to supplant hardware console/pc gaming, it will be interesting to see the future of consumer-owned compute hardware as a whole — as fast connectivity becomes more ubiquitous, how much of personal computing will move into the cloud? If gaming is the first use-case of personal cloud computing that enjoys mass market adoption, it will build consumer trust in the cloud and pave the way for other uses.

Indeed companies like Paperspace have recently launched offerings like Workstream — an individual cloud PC service, marketed at professional and enterprise use.

In the future, would you buy a paper-thin, flexible cellphone that is nothing but a thin client, through which you access your phone os running in the cloud? If the advantages are anything like the advantages that you see in gaming today, I’m betting the answer is yes.