Cloud computing is one of the most exciting innovations of recent years. After disrupting the film and music industries, it is now ready to bring drastic change to the global video game industry.
Along with this change is a potential uplift in the value of cloud service providers and a massive transformation in the way game publishers run their business. These could all turn into long-term investment opportunties.
Global technology giants such as Google, Microsoft, Tencent and Sony all announced earlier this year that they will start trials of so-called cloud gaming services. Google is currently in the lead, with its Stadia cloud gaming service scheduled to launch in November.
Cloud technology empowers a new software model that enables ubiquitous access to shared pools of storage, networks, servers, and applications. With cloud services, online streaming has become the main channel for distributing recorded music, putting an end to the era of downloads and, more remotely, physical distribution.
Similarly, the rise of Netflix-like video streaming services allows people to watch movies and TV shows with just a click on their mobile devices. Gone are the days when people would queue up for physical copies of newly released movies.
The global video game industry is poised to experience similar change in the coming years as the world's biggest technology names start to apply cloud technology to alter the way games are distributed and consumed.
Historically, gamers have had to download their software onto their own device – whether a PC or console for video games or a mobile phone for mobile games – in order to run them.
With cloud gaming, this will no longer be a prerequisite because the games will be run on the cloud. In its stead, all the in-game computing and calculations will be undertaken by massive computers operated by the cloud service providers.
That means gamers will be able to play the games on any internet-connected device like mobile phones and smart TVs.
Along with this transformation, video games will more likely be offered under a service model instead of a standalone product, because people will be able to play directly without spending time having to download each of them.
Google’s Stadia, for example, has come up with a $9.99 monthly package that allows gamers to play all of the 30 games currently available on its platform.
A foreseeable outcome is that gamers will play a larger variety of games and spend less time on each of them.
Chinese tech powerhouse Tencent is the only service provider in Asia that has begun testing its own cloud gaming platform. In April, the firm started trials for its cloud gaming service Start, claiming that it will let people play games anywhere, anytime and on any device.
WINNERS AND LOSERS
As with many other industries, cloud technology is poised to completely change the way the global gaming industry works. Inevitably, some parties will benefit from the transition while some will be worse off.
Console makers are one of the clear losers. The elimination of hardware in the video gaming industry means that companies like Nintendo and Sony will no longer be able to make money through selling their Switch and PlayStation consoles.
At the same time, game publishers could also struggle because their products will become part of the services provided by cloud gaming companies rather than standalone products.
The consequences are obvious. Publishers will find it hard to sell their games without partnering with cloud gaming companies. Even if they do, they will inevitably have to share part of the income with these companies for promotion and marketing.
With games being seen as a service, chances are slim that a publisher can make a fortune by creating one or two hugely popular games. That means the success of King Digital Entertainment, which once became a $7 billion-plus company with its hugely popular Candy Crush Saga mobile game, and Supercell, which was sold for $8.6 billion after scoring massive success with its Clash of Clans and Clash Royale titles, will unlikely be repeated in the future.
Meanwhile, cloud computing service providers like Google, Microsoft and Tencent are set to be the main beneficiaries. They will be able to get a share of the $135 billion video games market without actually making games themselves.
In addition, there will be ample cross-selling opportunities. These companies can bundle the video games with music, movie and other products/services available on their platforms.
What does this all these mean for investors?
With cloud gaming still yet to be launched, the potential of cloud gaming is not fully priced in the valuations of major cloud service providers at the moment, implying they could be opportunities for investors who believe such transformation will eventually create value for these companies.
In the case of the games publishers it will be interesting to see which can adapt to the transition by tapping new sources of revenue.
Possible new sources include organising events and competitions around their game titles, as well as merchandise, sponsorship and media rights.
Meanwhile, console makers will have to develop new forms of hardware that are less likely to be made obsolete by the switch to cloud gaming. Augmented reality (AR) and virtual reality (VR) goggles, headsets and controllers, here, are among the possibilities.