• Chris Cole

Gaming Part 1: The sky's the limit

Updated: Jul 20

Since video games were first conceived of half a century ago, we have seen their quality progress by leaps and bounds, with mind-boggling improvements in resolution, FPS, physics, and everything else you could imagine. Despite all these improvements, games always seemed to be limited - with low-resolution polygons, or unrealistic physics engines. Hardware seemed to be a permanent constraint on the imagination of game designers. Now, for the first time, that may not be the case any more. Enter... cloud gaming.

What IS cloud gaming?

Cloud gaming is at its core a simple idea. You take a complex game, with demanding performance requirements, run it on a powerful computer somewhere, and stream the resulting footage to wherever the consumer is located - whether that be in front of a phone, TC, or computer monitor. This easily allows you to overcome the performance constraint that was referenced earlier, but brings in its own problems.

Why will it succeed now?

What has been holding cloud gaming for the past 20 years? After all, it was first introduced at the turn of the millenium, and was briefly considered for the infamously demanding game Crysis. The short answer is the internet. Cloud gaming requires both high bandwith and low latency, solutions that weren't available until the advent of fibre vroadband, and now 5G. For those unfamilar with the terminology, if you think of your internet connection as a river of data, you need both a wide river (bandwith) and a fast flow (latency) to deliver the best experience. If both of these are not available, the experience is unplayable - with graphics quality lower than that provided on your home system, and input response times so long that it is physically sickening to the player. As these advanced internet technologies become mainstream, it will soon be technologically feasible to use cloud gaming.


Technological progress on the hardware front, such as the introduction of high core-count, high performance Epyc server chips from AMD also make ideas such as predictive input (where machine learning predicts the input of the user before it receives a signal and pre-renders it the scenario, reducing latency) economically viable.


Finally, trends in the gaming, and wider entertainment industry mean consumers are more prepared for the cloud gaming revolution than ever before. Subscription based monetisation ('Season Passes'); microtransactions; digital code downloads for games etc., as well as services like Netflix and Spotify being trendsetters all mean that consumers will be willing to accept paying monthly fees for access to games that they don't own, on hardware that they don't own, or free-to-play games that are highly monetised - something that would have been unacceptable a few short years ago.

Who to invest in?

The value chain of gaming looks something like this:

Game Developer:

They create the game’s code.

Game publisher:

They facilitate devs, from funding development to marketing/distributing the final product.


Platform supplier (Consoles, PC, mobile):

They create the device through which the consumer engages with the game.


Value-adders (content creators, esports):

They create content that consumers can engage with; games with active value-adding communities often have longer lives, higher monetisation rates and see more success.


In the distant past, each of these segments were well-defined. One company would stick to its segment and engage with one rung further up/down the value chain. However, in recent years the industry has seen major consolidation, with the advent of ‘first-party publishers’ – game publishers that create consoles, and develop and publish games alongside, exclusively for their console. Sony, Nintendo and Microsoft are the most well-known, but Tencent, with it’s Black Shark line of phones, are also a significant player in China. Notably, the major players have seen failure to fully integrate the value-adding segment into their platforms, with Microsoft’s Mixer livestreaming platform being a major failure for the company. As a side note, the opportunity here is significant. Influencers have major, well, influence with their viewers, and if you have major influencers under contract, and control what games they play, you will be able to control the success of new games.


The radical changes that cloud gaming promises have attracted many new players to the industry, with Google’s Stadia programn and Nvidia’s Geforce Now being the two biggest new competitors. Investors hold high hopes for these services, however, in my opinion these projects are doomed to failure. The subscription model of both of these services mean developers/publishers end up with less of the total revenue generated, disincentivising them from releasing games on these platforms, as we have seen with the slew of games being removed from Geforce Now. If these new entrants were to offer more attractive conditions to developers, they would be unable to compete profitably on price compared to the traditional players, for reasons we shall soon see. In this situation, the developers/publishers hold all the power over the hardware provider.


The traditional consolidated giants have significant advantages compared to any prospective new entrants. Firstly, with their large stables of in-house developers, these companies can release exclusives for cloud gaming (as Microsoft has done with Flight Simulator 2020), attracting their existing fanbase to the new platform. Secondly, by utilising access to their existing hardware platforms, they can threaten to prevent publishers from releasing on their consoles – a devastating threat that could mean the end of an independent studio financially, and cause no end of sorrow even for the largest publishers. This means that unlike the situation with new entrants, the traditional players have all the power. Of course, the challenges are not insurmountable. However, it is unlikely that Google, who shuts down every service if it doesn’t immediately gain industry dominance, or Nvidia, who have little experience in software, will be the ones able to break the stranglehold on the gaming industry.


Of the traditional consolidated players, Microsoft seems to be the most advanced with cloud gaming. They are actively exploring different use cases for cloud gaming, from xcloud (streaming console-level games to phones) to Flight Simulator 2020 (a game with a level of detail that is simply impossible to create within the constraints of home gaming systems), while Sony has dipped its’ toes in with PSNow (streaming console games on PC), and Nintendo is as usual the laggard with its’ subpar software offerings.

Meanwhile, the situation is more complicated in the game publisher space. None of the big AAA publishers have announced plans for radical games that fully embrace cloud gaming. Indeed, Activision Blizzard, Take Two, Bethesda and others even removed their games from Geforce Now due to the aforementioned revenue issues. EA has its’ own ‘Project Atlas’ , which aims to integrate a game engine with cloud gaming services, however the success of this project is unlikely. EA has often started projects that fit in with the ‘trend’ of the time – notably with Origin, a competitor to Steam, but failed to execute upon its’ vision. Overall, it is difficult to see who will be the winners of the cloud gaming revolution.



Issues

Despite the rapid advancements in broadband technology, the ‘response time’ between servers and users is still significant, and will likely remain so until 6G. These times are at a point where they are fine for more ‘casual’ games, but competitive esports titles, where milliseconds could be the difference between life and death, are unlikely to be extremely successful on cloud gaming. In recent years, most growth in gaming has come from competitive esports titles, with gamers looking up to the success of the ‘value-adding’ professional esports players and trying to emulate them. While cloud gaming opens up a whole new frontier with regards to visuals, gameplay and story, its’ inherent latency issues could mean that the highest-spending players do not migrate to cloud gaming. While cloud gaming will still have a dominant role in the future gaming industry, it may not be all-encompassing as most people are expecting it to be.


Conclusion

Cloud gaming is an area of massive potential. All segments of the gaming value chain present opportunities for investors. My opinion is that Microsoft is the most likely to succeed in this area, although there are also opportunities in dedicated gaming companies if you would like more direct exposure to this sector.


Click here to read part 2 of this series and see how you can capitalise on the 'value-adding' segment of the value chain!

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