Online Video Game Streaming Is a Potential Goldmine
- By John Kinsellagh
What if companies involved in cloud computing or gaming could replicate Netflix (NFLX)'s highly successful digital streaming media model and apply it to the video game market? That question has been on the minds of traditional software game creators, cloud providers and other ancillary companies involved in the lucrative gaming industry.
Developers and media companies are looking to bring the popularity of the video gaming market -- like many other facets of computing -- and marry it to the ubiquity of the world wide web. The rewards for participating in such an endeavor? Companies involved in bringing video gaming to the cloud would be able to take a slice of billion-dollar revenue pie that awaits them.
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When most people think of the entertainment industry, the most common images that come to mind are Hollywood movies, famous actors and actresses, cable TV programs, popular network television series, music and sports. And indeed, this is the type of entertainment that Netflix streamed digitally, transforming the entire media industry overnight.
But the size of the unheralded video game industry dwarfs all other forms of traditional entertainment. The size of the video game market is mind-boggling. How large?
Consider these statistics. According to Dutch research group NewZoo, games played on PCs via personal consoles such as Xbox will generate an estimated $67.5 billion this year. This represents $25 billion more than the box office receipts of films worldwide.
Although the online gaming market could be highly profitable, at present, technical issues have prevented media and cloud service providers from offering digital online gaming to consumers. The game-streaming issues are challenging, with many technical and graphical moving parts. Unlike movies and music, video games are interactive, with highly detailed graphical images that must be instantaneously created in real time based on the decisions or actions of a player.
The biggest technical issue to overcome is latency -- the annoying lag time that occurs when a user's hardware is insufficient to keep pace with the millions of lines of code that are necessary to respond and convert into graphical objects hundreds of user responses in a short period of time. Latency is why hard-core gamers need to constantly upgrade their existing hardware to the latest video cards and more powerful processors with higher clock speeds. For serious, or even casual gamers, even a half-second lag in converting the massive amount of data is noticeable and can impair performance.
Solving these data-transfer technical issues is critical for attracting existing and new consumers into an existing software-gaming market that over the years has has experienced phenomenal growth. Between 2013 and 2017, video gaming revenue rose 59% to $121.7 billion worldwide and will reach $134.9 billion by the end of this year.
The great promise of digital streaming of popular gaming titles such as "Call of Duty" is that users would no longer need to invest hundreds, and in some cases, thousands of dollars purchasing hardware necessary to play the latest graphic-intensive interactive games. A hardware-free gaming experience would bring many new customers to the fold by making the entry costs for participation in a high-quality gaming experience relatively cheap. All that would be required is a smart phone or other portable device. Elimination of expensive hardware requirements makes the potential cloud gaming market enormous.
Many media observers believe that the data-crunching challenges can be successfully solved by the spread of data centers and the implementation of the next-generation wireless protocol known as 5G, which will allow people to play the popular and data-intensive games without a hitch. Playing games would be as simple as opening up Netflix and looking for a movie to stream. Once the data-transfer issue is addressed, those companies looking to enter the digital-streaming gaming market will be richly rewarded as the number of people with internet access is in the billions.
Several tech players are well poised to enter the new market. Amazon (AMZN), with its massive AWS cloud capabilities, could offer consumers a broad array of games and multi-player experiences. Microsoft (MSFT) is also well positioned to be a player in the digital gaming business by virtue of its growing cloud computing capabilities.
Traditional software game developers could continue to offer games or improve existing ones for streaming or partner with hardware and console makers such as Apple (AAPL).
Those existing gamers who have exited the hobby due to the increasingly expensive hardware and graphics processors required for playing the latest titles lag-free would be enticed back to gaming by the varied offerings a subscription model could provide.
Although the shape of the online streaming game experience is a new one and has never been implemented on a mass scale, most media industry media observers believe that the future of the business lies in monthly subscriptions, similar in structure to how consumers are receiving the bulk of their digital streaming media currently.
There is a cautionary note, however: The online video game market will be extremely competitive, with consumers having before them a wide array of services through a number of players including Amazon, Microsoft, Netflix and Electronic Arts (EA). Just as Netflix will eventually feel the competitive pressure from upstarts AT&T (NYSE:T) and Time Warner (NASDAQ:TW), the subscription model will, at some point, become price-sensitive.
Disclosure: I have no position in any of the securities referenced in this article.
This article first appeared on GuruFocus.
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