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Video Gaming Shifts to the Cloud

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- By John Kinsellagh

Alphabet Inc.'s (GOOGL) (GOOG) Google announced on Tuesday its new cloud-gaming service, called Stadia, is slated to launch later this year. The announcement is a clear indication that gaming, like other entertainment mediums, is migrating to the cloud or being delivered via streaming.

Stadia will allow gamers to play streamed titles on their computers, televisions and smartphones without the need for a separate console. Broadband-connected consoles can now pack enough internal storage to rival personal computers, liberating serious gamers from the need to constantly update to expensive hardware to match the ever-increasing processing demands of more graphic-intense titles.


The gaming market is astronomical, hitting $135 billion in sales last year. 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 Netflix (NFLX) has been successfully streaming, transforming the entire media industry overnight. Cloud-based video gaming will similarly disrupt the entire hardware and software gaming-related industry.

The size of the video game market is mind-boggling. How large?

Consider these statistics. According to Dutch research group NewZoo, games played on personal consoles such as Xbox will generated approximately $67.5 billion in 2018. This represents $25 billion more than the box office receipts of films worldwide for that same year. The scope of the unheralded video game industry dwarfs all other forms of traditional entertainment.

Gaming-related stocks rose after Google's announcement: Advanced Micro Devices (AMD) increased 12% on the day, adding a hefty $2.8 billion to its market cap. The company's graphics chips will be used in the cloud gaming service.

Cloud gaming represents a goldmine for companies that are positioned to leverage their existing strengths and marry these to offering comprehensive and popular titles. Microsoft (MSFT) and Amazon (AMZN), given their established cloud services computing networks, are poised to capture a significant portion of this market. A once untested and unsuccessful idea is now a reality, due to dramatically increased broadband speeds that are necessary to handle the tremendous computing requirements demanded by today's popular titles, which include "Halo," "Fortnite" and "Call of Duty." Latency, or lagging that was a common problem in the pre-broadband days, is no longer a hurdle that gaming-related companies must surmount.

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Cloud computing-assisted gaming offers numerous advantages, as users can access vast computing power online using simple devices like phones, cheap laptops and TVs. Since cloud gaming allows users to use their phones to play high-resolution titles, themarket potential is enormous since the only hardware equipment necessary to play are devices billions of users already own. There is no need for constantly updating existing hardware with higher chip speeds and more powerful processors necessary to play the latest games.

The key to Google's long-term success in cloud gaming is its ability to obtain popular titles produced by industry giants, such as Activision Blizzard (ATVI). To date, however, only Ubisoft Entertainment (UBSFY), who produces "Assassin's Creed," has publicly committed to the Stadia platform. Electronic Arts (EA), Take-Two Interactive Software (TTWO) and Activision have not publicly announced any partnerships with Google at present.

For music, downloads were only a transitional profit-making endeavor to see the industry through to today's streaming services, including Spotify (SPOT), Apple Music (AAPL) and Amazon Music. For $10 to $15 a month, subscribers got access to nearly any song or album they can think of, playable across smartphones, tablets, cheap laptops and more. The cloud gaming efforts by the initial players such as Microsoft and Google are an attempt to replicate the profitable music streaming business to the gaming sector, for the prize of recurring revenue that will help bolster profits on a predictable and long-term basis. Microsoft has adopted this exact business model to its cloud services offerings, which has been responsible for meteoric rise the company's earnings growth over the past several years.

Google will face some stiff competition. Longtime gaming graphics processor company Nvidia (NVDA) and Microsoft are also developing their own versions of streaming video gaming, called Project xCloud and GeForce NOW.

Disclosure: I have no positions in any of the securities referenced in this article.

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This article first appeared on GuruFocus.