Cloud Gaming — the industry goes mainstream
Cloud gaming, at its core, is the ability to separate the technology required to play a video game from the device the game is being played on. This is accomplished by using remote data centers, which harness a company’s processing power and stream a game directly to a user’s device.
Games do not have to be downloaded and will no longer be tied to specific platforms or devices. Someone could use the power of the cloud to play a high-quality, graphics-intensive game on an older or weaker device. This will result in less time and money spent on expensive video game consoles and a shift away from pricey gaming computers. Gamers could theoretically play new games instantaneously on any device anywhere.
The sweet promise of cloud gaming
Imagine video gamers, untethered from their computers and consoles, playing crystal-clear versions of their favourite games anywhere. They might traverse the futuristic world of the sci-fi shooter game Halo on their mobile phones while riding the subway, or dust off old MacBook computers and hop straight into the jungle of the battle arena game League of Legends.
That’s the rosy future promised by cloud gaming, a nascent technology that could reshape how people play games. And depending on whom you ask, that future might have arrived already.
Facebook has expanded the reach of its cloud gaming platform to cover 98 percent of the mainland United States, Microsoft’s cloud gaming service is now available on more devices, Amazon has broadened access to its burgeoning cloud service, giving Prime members a free trial versions.
It has been a busy period for the small but growing cloud gaming industry, which is expected to surpass $1 billion in revenue and 23 million paying customers by the end of this year, according to Newzoo, a gaming analytics firm. Revenue is projected to grow to more than $5 billion by 2023 as the technology improves.
Cloud gaming approaching an inflection point
Cloud gaming has been a widely discussed topic over the past couple of years and rightly so, as it presents a large market opportunity with many players betting on it. According to Newzoo’s recent study, the cloud gaming market is expected to generate $1.4bn revenues in 2021 (up from $633m in 2020) and grow to $5.1bn in 2023 (Newzoo, 2021). The space is crowded with various stakeholders such as console providers, game publishers, technology enablers, tech giants and telcos. Yet, it is only recently that the main technology drivers such as 5G, mobile and cloud computing have matured, resulting in cloud gaming approaching an inflection point towards mass market adoption.
In our opinion, the next couple of years will be key for cloud gaming to ‘cross the chasm’ from early adopters to early majority and establish itself as a mass market technology.
Cloud gaming overview
As a simple definition, cloud gaming (a.k.a. gaming-as-a-service and gaming-on-demand) is a technology solution which enables users to stream games on different devices. Rightly so, it is often referred to as ‘Netflix for games’. Although the end user experience is the same, there are different ways to enable game streaming and we briefly discuss the methodlogy below.
Streaming type
There are two main types of cloud gaming tech — file streaming (45% market share) and video streaming (55% market share).
File streaming — in file streaming, the game content is downloaded at the end user’s device while playing, which allows access to games with low bandwidth internet connection without a lag. This requires a device that has hardware capabilities to operate the game such as gaming console. This method is used by PlayStation Now and Xbox Game Pass.
Video streaming — in video streaming, the hosting and running of games is done either on large, powerful servers or public/private cloud, which eliminates the need of console. The game content is streamed, compressed, and fed to the user via world wide web, instead of being downloaded. This method is used by most B2B service providers.
Technology
Cloud gaming requires usage of a cloud (public or private) or a powerful server on which the game content can be streamed. Currently, most companies are using public clouds such as AWS or Microsoft Azure, but due to their high cost we have seen some players adoption alternative solutions such as a hybrid between public and private clouds (Blacknut) and leasing of third party servers (Gamestream). Currently, Microsoft is working on a next generation cloud gaming infrastructure, which will be ready in 1Q 2022 and will cost $0.25/hour to third parties, which is expected to shift technology use in favour of public clouds.
End-user Device
The cloud gaming market is also defined by the device/platforms on which players can access the games. The console segment accounts for 60% of the market followed by PCs at c20% and mobile at c15%, while connected TVs accounted for only 5% of the market. This is mainly since B2C cloud gaming services such as PlayStation Now and Xbox entered the market first. Yet, in the future, we expect to see an increase in penetration of mobile devices as well as a shift towards a multi-platform model.
Business model
The cloud gaming market can also be segmented by business models — B2B and B2C. The B2C providers such as Sony, Microsoft, Nvidia etc account for majority of the market (c80%). Under this business model, subscribers either receive access to a platform with multiple titles included in the subscription or need to purchase individual titles and just receive access to the technology, which enables them to easily switch between devices.
However, in the future we expect faster growth in the B2B market as 5G deployment increases and telecoms extend the distribution network of their services. Under the B2B business model, cloud gaming services enable telecoms and game publishers to offer the service to their subscribers under a revenue share business model. These players usually do not own the games available on the platform but have formed partnerships with game publishers and pay warranties in exchange for access to the titles.
Drivers & Trends
As we briefly mentioned above, the main technology drivers behind cloud gaming penetration are 5G, mobile and cloud computing.
5G and cloud computing
Fast internet connection, storage capacity and processing abilities of computers allow game streaming with low latency and fast data transmission across different devices. In addition, increasing investment in 5G infrastructure from telecoms has increased their efforts to add additional services to subscribers such as cloud gaming to increase the return on their investment and help differentiation among competitors.
Mobile penetration
High-cost gaming hardware and consoles in addition to affordable internet connectivity, has resulted in a shift towards mobile gaming, especially in markets such as Asia. Mobile games require less storage and data processing, which makes them great targets for cloud gaming services. According to some industry experts such as Ubisoft’s CEO, gaming hardware won’t be needed in the long-term and the future is in cloud gaming.
One trend we expect to observe in the future, is uneven adoption across regions. In developed markets, we expect users to subscribe to cloud gaming while also keep using consoles. Yet, in developing markets with high mobile penetration, we expect a ‘jump in technology’ with users moving directly to cloud gaming on mobile without investing in expensive, outdated hardware.
Asia Pacific as a key market
Asia accounts for c60% of the gaming audience and players. In addition, mobile gaming is widely spread in the region, which makes it the best target for cloud gaming services going forward. Industry experts forecast growth in the cloud gaming market in the region to surpass growth in Europe and North America.
Investment trends
Investment overview
According to Tracxn there are 77 cloud gaming companies, 40 of which have been funded (52% of total) and 7 have been deadpooled. Total funding amount is $462m ($6m per company).
Asia Pacific as a key market
Asia accounts for c60% of the gaming audience and players. In addition, mobile gaming is widely spread in the region, which makes it the best target for cloud gaming services going forward. Industry experts forecast growth in the cloud gaming market in the region to surpass growth in Europe and North America.
By geography, 19 companies are based in North America (28%), 28 in Europe (41%), 6 in China, 2 in Israel, 4 in India, 3 in SEA and the rest in other regions.
By company stage, 37 companies are unfunded or deadpooled, 8 are at Seed stage, 8 at Series A, 2 at Series B, 2 at Series C, 13 have successfully exited and 7 have raised some funding with unknown stage.
IPOs
There has been only one IPO in the sector. AMPD Technologies (2015, Canada) is a provider of high-performance cloud and computing solutions for low-latency applications, including video games and eSports, digital animation and visual effects, and big data collection, analysis, and visualisation. The company went public in Oct 2019 for $12m and since then has been renamed AMPD Ventures.
Acquisitions
There have been 9 acquisitions in the cloud gaming space, predominantly of cloud gaming technology providers by service providers such as Google, Sony and Facebook. The biggest acquisition in the space has been by Sony of Gaikai for $380m in 2012, followed by the recent acquisition of Parsec by Unity for $320m.
Biggest rounds
Overall, 6 companies (Shadow, Ubitus, Parsec, OnLive, Gaikai and Gloud) account for c80% of the total funding in the sector. Some of the most recent funding rounds by stages are:
Series B — Parsec raised $25m in Dec 2020 from a16z; Gloud raised $11.5m in Dec 2020 from Tencent.
Series C — Beijing Zhanxin Zhanli Information Technologies raised $100m in March 2021; Ubitus raised undisclosed round in March 2021 by Tencent, Sony Innovation Fund and others.
The most active investors
Below is a summary of the most active investors in the cloud gaming sector by stage. Tencent overall is most active in late stage with its participation in Ubitus’s Series C round and Gloud’s Series B round.
Major players
The players best positioned to win the cloud gaming market are the ones that provide the best user experience (high quality, low latency) and best content (games across different devices). Of the two, content is king and will be the key differentiating factor, while technology hurdles will be overcome by everyone. The infographic below summarises the key players in the market based on business model (B2B or B2C) and product (technology, platform, content or all).
Conclusion
We at Rocket Capital believe cloud gaming is on track to become a mainstream technology and the next couple of years will be key for defining the market leaders in the space. If you are excited about cloud gaming and want to share your experience, please reach out to us at viktoria@rocket.capital and akarsh@rocket.capital.
About Rocket Capital
Rocket Capital is an early-stage VC fund investing in New Media Technology start-ups. We invest in pre-Series A, Series A and Series B stages, but we are open to investing earlier/later if we have strong conviction in the idea and founders. We have deep respect for all founders and the products they are building, and believe in creating long-lasting relationships in the industries we invest in.
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