Breaking Down the Idea of a Netflix for Video Games

The era of game streaming is closer than it appears, and there is a couple of clear reasons for this.

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It seems safe to assume that most Internet users across the globe have heard of Netflix and its video streaming service. According to the company’s latest financial report, the subscription-based offering counts 139 million people as paying subscribers worldwide, which means 2% of the world population enjoys films and TV series on demand. In fact, it seems obvious that Netflix has become a synonym for video streaming in general.

When it comes to video games, this kind of entertainment has only recently started its move toward various subscription-based business models, collectively referred to with a shiny new term Games-as-a-Service. (Although this term may include much more than just subscription-related gaming.) However, it is rapidly becoming more common that we hear about a potential “Netflix for video games,” which means some corporations are already working on making game streaming possible.

With the video games industry expanding more rapidly than most of the traditional tech sectors, it is clear huge changes are going to be brought by the shift of gaming to the cloud. So let us review what exactly is this “Netflix for video games,” how the idea of game streaming appeared with the new trends in the industry, why is it important, and who exactly can develop such a solution in the near future.

The video game industry has (not so) quietly undergone a big number of changes: microtransactions, development costs, and competition

Before we can start discussing the game streaming technology, it is important to understand why the idea of game streaming has recently started to become more real. And it all begins with…microtransactions.

Microtransactions, or in-game purchases, have been widely used in mobile gaming since the early stages of development of this kind of entertainment. Every person who has ever downloaded a game (or any other application) for their smartphone has experienced these sometimes annoying pop-ups which offered to buy an additional turn, reduce waiting time until a car is repaired, improve attacking capabilities, etc. Even though certain microtransactions had elements of gambling, this business model did not face significant opposition and gained solid traction in modern mobile applications— after all, if users get a game or an app for free, it seems like a reasonable solution for the publisher to try to make money off some in-game items. In other words, the trade-off is justified.

When microtransactions started to find their way in triple-A (high quality, big budget) titles for consoles and PC, the things became a bit more complicated. The video games crowd has not met the changes with positivity, and some game publishers found themselves in a center of a backlash, which hurt their sales and reputation. The most vivid example of such a situation is Electronic Arts and its Star Wars: Battlefront 2 title. To remind, the company tried to implement a bit too aggressive monetization model in the game, which allowed certain players to basically buy their way up, making them more powerful more quickly, compared to players who decided to not spend additional money in the game. Importantly, this monetization system had been turned off before the game went public, as too many gamers expressed their anger and disappointment.

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And again, the opposition from players in the case of microtransactions in AAA games seems to be quite understandable — why should you pay for something in a game which cost $60 (or even 70 EUR in Europe) in the first place? And how does the ability to become more powerful in a game by paying real money comply with the very principle of fairness in the video games?

However, from the publishers’ perspective, the situation is not that simple. And it all comes down to development costs.

It has been reviewed in multiple pieces of research that the costs associated with developing a AAA video game title have been soaring over time, reaching new peaks every year. The picture below summarizes the issue perfectly.

Source: Raph Koster website

In turn, retail prices for these games have remained stable over the last 6–7 years since the latest generation of video game consoles (PS4 and Xbox One) was introduced. There is an uncountable number of reasons for that, which we will not discuss in this article, but the ultimate conclusion is the following — it has become more difficult for the video game publishers to generate returns (simply, make money) off operating in the video games industry. Therefore, their desire to include as many paid in-game items as possible seems logical from a pure numbers perspective.

Unfortunately (or, probably, fortunately), the monetization strategy which relies heavily on microtransactions is too difficult to navigate in the modern society where instant feedback is available and the level of transparency is relatively high. In other words, if there is a game with too many microtransactions, players with access to a demo version will instantly provide negative feedback, which in the end will impact game sales severely. Again, EA’s Battlefront 2 is the clearest example of how things may go wrong due to aggressive monetization, even though the game itself looked rather appealing.

Moreover, the intensity of competition in the video games industry has been increasing over the recent years, which also made it more difficult for companies to generate enough revenue to justify high costs of development of good, story-based games. For instance, a service-like game Fortnite, which is free to play, could quickly absorb a significant share of the audience despite having very basic graphics, only one map, and one regime to play.

And in this situation, the business model pioneered by the likes of Netflix can solve many problems related to monetization.

So what exactly is a Netflix for video games?

The idea of a “Netflix for video games” is quite simple — a service that allows all people to play high-quality video games on any device through a subscription offering. It still remains uncertain how game streaming will shape up in the end, but reviewing the first attempts to create such a solution, we can identify some patterns.

First of all, game streaming will most certainly be closely connected with cloud technology. Modern video games demand significant computing power to be played, which is why players need a dedicated machine (which can cost up to $10,000 when it comes to hardcore PCs) to run gaming software. If providers want to make video games accessible on all devices on demand, the computational part will need to shift to the cloud. In other words, users will no longer need a powerful machine to actually run games, but will rather just stream content from a cloud.

Secondly, there will likely be high consolidation in the industry around big cloud providers. The trend should occur due to the high costs associated with the implementation of game streaming. After all, creating cloud infrastructure with great bandwidth would imply significant investments in hardware and software that would allow smooth experience.

Moreover, the example of the current video streaming market shows that certain players are likely to dominate the market due to their willingness to invest in original content. For instance, Netflix spent $13 billion on content in 2018, and the number is expected to increase to hefty $15 billion in 2019. This allowed the service to expand rapidly, as more films and TV series mean more people are willing to subscribe. In the case of video games, we can expect some corporations to broaden their portfolios of in-house games and studios in order to lure players to their platform.

So who will take the crown for becoming a Netflix for video games?

When it comes to video streaming, such names as Netflix or Amazon Prime are the ones that easily come to mind. I believe that a similar degree of consolidation processes will happen in the video games sector.

The first name that looks like a potential winner of a future platform war is Microsoft. The company has been in the video games market for a long time with its Xbox game consoles (more than 17 years since the original Xbox was launched), which means it has enough experience and capabilities in the field. Microsoft was also the first to offer a comprehensive service for gaming on subscription, namely Xbox Game Pass, which gives access to more than 200 titles for a monthly fee. Regarding portfolio of games, it is interesting that Microsoft has acquired 7 game studios over the last year, suggesting the company is getting ready to create a ton of original content for its offering. In total, the corporation now has about 13 game studios under its management. (There is a detailed article on Microsoft and its potential video games service available here.)

Microsoft’s (not so) secret project to create a Netflix for video games is currently called project xCloud. Importantly, it is known the tech giant is one of the most prominent players in the cloud market. This brings us to the next possible group of providers: cloud companies.

As regards cloud companies, Amazon and Google are those that have a strong position in the market. This can allow the two players to quickly deploy and expand capabilities for services such as game streaming, positioning them better than most other companies. It is notable Google has recently beta tested a way to stream Assassin’s Creed Odyssey via the cloud, which allowed a small group of testers to play the high-demanding game on simple and not so powerful devices.

In turn, not so many people know that Amazon already has a solid ecosystem for gaming. This includes a game engine Amazon Lumberyard, AWS Cloud, a streaming service Twitch, dedicated servers for gaming such as Amazon GameLift, and other pieces of technology. For more detail, you can also read this article: Amazon As A Gaming Company.

Finally, although so far there has been little interest from Sony, the company will likely unveil some sort of game streaming technology in the coming years. After all, the creator of Playstation has won the current platform war, as Sony’s latest console, PS4, sold almost twice as many units as Xbox One. Moreover, Sony’s in-house development studios are considered to be the best in the industry, evident by such titles as The Last of Us, God of War, and other games which have won numerous awards over the years. Therefore, in the future era of game streaming, Sony would have a solid competitive advantage due to its ability to create excellent games rich on storytelling.

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Game streaming can become a viable solution to several industry-wide problems

If the transition toward the subscription-based cloud gaming is successful, the financial issues discussed earlier in the article will likely be solved, at least to some extent. Although the business model of Netflix still requires a huge degree of investments, the company generates significant profit from its business. (Not to confuse with actual cash flows, but this is a topic for another discussion.)

Game streaming would make video games more accessible to the general public, thus expanding the total addressable market significantly. Hence, it is easy to imagine that eliminating the entry barrier in the form of an expensive gaming machine would open video games to less wealthy individuals and families. This sounds like a win-win situation: providers would enjoy more players using their platforms, which would decrease their marginal costs by leveraging the economy of scale, while consumers would get access to a broad range of content for some subscription fee. This is particularly promising in light of a possibility to get higher exposure in countries with relatively low average income but with high growth and dense population, like India, Brasil, or African countries.

So to conclude, the primary reasons for a game streaming service to appear in the near future are as follows:

  • The video games industry needs dramatic changes in the ways the content is monetized, as the current model does not look robust for the long term.
  • Modern technology, such as cloud services, makes it possible to stream games on demand and allow people to play high-quality games on a not powerful machine, or even on a smartphone.
  • The current example of the likes of Netflix seems to work (mostly) fine in terms of financial viability for corporations.

Therefore, it is clear the cloud gaming technology will make its way to our lives in the near future, and we will start talking more about a “Netflix for gaming” already this year. This type of service has a very promising future, given that video games are quickly becoming more mainstream, thanks to free-to-play titles like Fortnite.

And here, the idea of a centralized, subscription-based service that would allow people to enjoy high-quality video games irrespective of a device they possess seems more than encouraging.