Why Amazon Will Monopolize Video Game Distribution Just Like Online Retail

Let the Games Begin

Amazon is in the process of turning Twitch into a full-fledged video game distribution platform. This isn’t particularly surprising — Amazon is already one of the world’s largest retailers of video games and they’ve made big moves to buy additional market share. But imagine this: what if instead of downloading games from Twitch, you “streamed” them? The machine running your game would live in the cloud where it piped eye-bleedingly good graphics to your desktop in less time than it takes to wink. Amazon is uniquely equipped to support such a distribution model, and it has the potential to unravel the entire gaming industry.

So What’s Cloud Gaming?

The model described above is called “cloud gaming” and it’s the backbone of a nascent industry with huge potential. Although cloud gaming has seen limited success, it has the potential to revolutionize gaming. Users could run games at the highest possible resolutions on virtually any machine — imagine playing Battlefield 1 on your iPhone! Cloud gaming also has the potential to disrupt the console industry; rather than having to develop for multiple platforms, game developers could focus on PC releases which could be streamed to televisions through streaming devices similar to an Apple TV. Cloud gaming could also lead to a Netflix-styled subscription model: think “videogames as a service” (VaaS). What does all of this mean for the consumer? Cheaper access to more and better content. Oh, and we haven’t even touched on the potential for virtual reality and augmented reality gaming.

Courtesy of Verify Recruitment

But there’s one major reason we aren’t already playing our games in the cloud: scalability. It turns out that it takes a tremendous amount of computing power and infrastructure to reliably render 4k (8k!?) graphics for thousands (millions!?) of consumers. The graphics have to be rendered and piped so fast that the user can’t even tell they’re using an online service.

This issue is further complicated by online gaming. In this case, the graphics rendering server has to talk to both the client and the online game hosting server — these could be located in different states or even different countries. What does that add up to? Unplayable latency that prevents this type of service from taking off. Considering a large majority of gaming is now played online, scalability is a serious roadblock to cloud gaming’s success.

But consider this: what if Amazon hosted both the graphics rendering servers and the online match servers in the same cluster? The latency between the graphics and match servers would become negligible and the only bottleneck would be the user’s own internet connection. Amazon might be the only company in the world equipped to provide this type of a service — with the potential exception of Microsoft. Oh, and AWS is already working on it.

So What’s the Competition?

Let’s take a look at the industry incumbents: Sony and Microsoft.

Sony acquired cloud gaming platform Gaikai in 2012 for $380M. This service currently only streams PS3 games — a downgrade from the content available on the PS4. Sony also lacks the technical sophistication of Microsoft whose Azure cloud platform has already become a global leader. Perhaps to best sum it up: if you think Sony will ever be able to reliably stream 4k graphics to millions of users then you’ve clearly never used PSN (#PSNDown).

On the other hand, Microsoft has its own game studio, the power of Azure, and a massive network of developer relationships. At first glance, it seems like it could be a strong competitor to an Amazon VaaS network. But consider this — Microsoft’s Xbox devision has been bleeding money ever since Sony’s PS4 dominated the last console war. The majority of the revenue Microsoft does generate is from licensing agreements with game developers to release games on the Xbox platform.

Source: Statista

That said, Microsoft generates a lot of revenue from PC sales which are steadily declining. Although a VaaS network would likely be more profitable than Microsoft’s current video game service (monthly subs minus loss-leading hardware sales), it would almost certainly decrease demand for Microsoft’s core PC product line; consider that one of the PC industry’s few growth markets is in high-end gaming PCs.

Then there comes the question of whether or not Microsoft would cloud-stream PC games or games built for a proprietary platform (e.g. ‘Xbox OS’). It seems like they would have to stream PC games; if they stuck with a proprietary model they would risk being overrun by a competitor with access to more content. If Microsoft moved forward with a PC game model, they wouldn’t be able to negotiate as strong of licensing agreements with developers; they’d only be able to charge for the right to stream on their proprietary platform, not to develop for it. In a new industry where anyone with servers could start a marketplace, Microsoft would lose a lot of its negotiating leverage.

In short, Nadella has done a lot to improve Microsoft’s culture, but it seems unlikely that Microsoft would make the first steps towards cloud gaming. Microsoft is a large, bureaucratic company with too much invested in the current distribution model to innovate quickly. Amazon is also a large, bureaucratic company — but it has little vested interest in the current video game distribution model and its innovative culture allows it to move quickly.

So Why Should Amazon Care?

Although Amazon already generates revenue selling video games with Amazon.com, it stands to generate much more from a platform licensing and subscription model. The video game industry is a highly profitable, $100bn market and is ripe disruption a la “your margin is my opportunity”. Amazon has already declared that its “all in on video games” and the company is uniquely equipped to corner the market (with a moat as big as AWS surrounding it).

But it gets even better for Amazon. Not only does the company stand to corner a profitable industry, it could also leverage synergies across its other business lines. Most importantly, the company could place more Amazon-branded TV set top boxes into more homes, almost certainly with an Alexa integration. Why is this important? Because it will drive retail sales as well as adoption of Alexa, Amazon Video and Amazon Music. It will also give the company reams of new data it can use to target users with ads. And perhaps most importantly of all, depending on how the subscription model is set up, it would be a huge incentive to become (or remain) a prime member. Not to mention the obvious synergies with Twitch — more ad revenue, more subs revenue, etc.

So What’s the Path to Global Domination?

Jeff Bezos contemplating global domination of another $100bn industry (source: Recode)

Amazon doesn’t just have the infrastructure for cloud gaming, they even have their own studio, Amazon Game Studios. Amazon could launch its first “killer game” leveraging AWS to render cutting edge graphics. You would stream the game via Twitch and it would be hosted (both graphics and online infrastructure) on AWS. Play that out — Amazon’s platform is the only place in the world to play games with the best graphics, graphics that are far superior to what your $3k home desktop could compute. A few product cycles later, developers will have no choice but to host their content and infrastructure on Amazon’s distribution platform and AWS. All of a sudden Amazon has created a virtual marketplace as powerful as Amazon retail — call it the Netflix of gaming.

This strategy would start with a desktop integration (Twitch conveniently just released a desktop app). Amazon is famous for its bias towards experimentation; if the desktop VaaS model was successful, it would only be a matter of time before the Fire TV was rebranded for video games. The price of this unit would be similar to the price of an Apple TV ($150) — a far cry from the price of an Xbox One ($300) or a PS4 ($400), both of which are several years old. A subset of games could be included with a prime membership, another tier of games could be available with a $20 / month subscription (perhaps a Twitch membership), and a third tier might only be available for purchase. No matter the business model, the set-top box would cost far less than an Xbox or a Playstation, have superior graphics, and probably include more features.

Given the current state of internet infrastructure in the United States, we might be waiting a few more years for cloud gaming to take off. ISPs would need to improve access to HSI and remove infuriatingly low data caps in order to enable mass adoption. And don’t expect incumbents to go down without a fight. That said, the stakes are high and the possibilities are endless. Expect Amazon to pilot a US launch in the next few years.

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