Will cloud gaming kill physical video games?

This week Google officially revealed its Stadia cloud gaming platform, Charged takes a closer look at whether this could mean the end for physical video game retail. 

In 2017, Netflix’s chief executive Reed Hastings told investors that the company’s main competition was sleep.

The same year digital streaming services like Netflix accounted for 71.9 per cent of the entertainment retail sales market, while physical video retail sales dropped 17 per cent, according to the Entertainment Retailers Association (ERA).

At the end of last year HMV, one of the last remaining vestiges of physical music and video sales, officially appointed administrators largely signifying the final nail in the coffin for a market decimated by the streaming model.

This year, Hastings told investors that Netflix’s largest competitor was now Fortnite, the free-to-play online multiplayer game which has spawned a generation of die-hard followers, its own globally recognised dance moves, and $3 billion in profits last year.

Rather than pit these two entities against each other, the world’s largest tech companies including Amazon, Sony, Microsoft, Verizon, Google and Apple are working to launch the “Netflix of gaming”.

Each have announced the development of a cloud gaming service, promising to offer gamers a AAA gaming experience on any device, without the need for an expensive console or high-end gaming PC.

With the industry’s biggest hitters all ploughing money into launching a video game streaming service to mirror that of Netflix or Spotify, are physical game retailers like Game and CEX destined to crash and burn just like HMV?

Akamai Technologies’ senior manager of media industry strategy Paul Jackson told Charged that this is not the first time big tech companies have tried to launch a cloud gaming platform.

“These services have been around online, coming up to a decade now,” he said.

“The original firm was called OnLive which crashed and burned, there was another firm called Gaikai which Sony bought and is now effectively PlayStation Network, Nvidia’s service has also been around for three or four years.”

These companies largely failed for two reasons. Firstly and most crucially, was a technological roadblock.

“Getting the content to consumers is exactly like Netflix, you’ll be streaming in HD, possibly beyond HD, quality content at 25/30 frames per second to a consumer’s TV,” Jackson added.

“The difference with Netflix is, you’re then interacting with that and you need the image on the TV to respond to that in less than 50 milliseconds, the time we can perceive a lag between input and response. That’s the trick.

“Regarding the streaming and subscription model I can’t afford to put my game in a £7.99 a month bundle because out of that £7.99 I am going to get a fraction of that”

“These companies have been hamstrung by having pretty poor selections of games. This is down to the publishers saying I don’t want you to make my brand-new game look rubbish. It’s great you might be able to play this on your TV rather than on an expensive console, but if it looks absolutely rubbish and plays dreadfully, all I am going to do is annoy potential future buyers.”

Ten years down the line and with the considerable resources of the world’s leading tech companies behind it, cloud gaming is now fundamentally technologically viable.

As long as gamers are within a relatively close proximity to a server which is actually running the game, they’ll be able to stream complex games without noticeable lag. In the race to launch the first mainstream cloud gaming service, this gives companies with a more widespread infrastructure like Amazon or Verizon a significant advantage.

However, Green Man Gaming’s chief executive Paul Sulyok argues that despite seamless cloud gaming now being possible, it is not yet financially viable.

“From a technology perspective the ability to stream a video stream down from the cloud is around, the ability to do that in an economic manor is not,” Sulyok said.

“I can create a virtual CPU and GPU, shove it up in the cloud, get a good enough stream down if I have good enough bandwidth, and play a game.

“The trouble that you’ve got is that if you’re paying $3 an hour for a GPU in the cloud (a GPU/CPU cluster could cost you around $3.50) then by the time you’ve played it for 10 hours, you’ve spent the entire net revenue that game would have generated. And that’s the problem.”

READ MORE: Google reveals its Stadia video game streaming service

It’s not just money that is the issue, the Netflix model itself simply can’t work for gaming publishers.

“Regarding the streaming and subscription model I can’t afford to put my game in a £7.99 a month bundle because out of that £7.99 I am going to get a fraction of that, the fraction I’m going to get is not going to be able to repay the entire investment I made in the game,” Sulyok added.

Gaming publishers need to make their money back within six to eight weeks, as unlike the music industry, full price games have a very short shelf life.

“That’s because game sales, and we see this because we sell everyone’s games, spike and then drop,” he continued.

“When they drop the next big title comes out and there’s another spike… As opposed to the music industry, if I spent £1 million making an album, I have a long tail on the way back, people are still listening to Queen albums now and there’s still a royalty dropping through for the artists. Production costs are lower, the tail is longer.

“If you have a 20-year-old game disc game and console you can still plug it into your TV and play it, you can’t do that with streaming, and that’s what’s held them back previously”

“Games production costs are higher, and the tail is almost non-existent.”

Perhaps more importantly the gaming community, on which the industry owes its dramatic rise to prominence, may not be ready for such a transition.

To start with the concept of ownership is important to many gamers. Netflix routinely removes content when its licence or agreement with a publisher has expired. The idea of putting 25 hours into a game only for it to be removed is likely to be a red flag for many gamers.

Jackson added: “What’s different in the gaming market is, there are an awful lot of people still attached to either owning a physical disk, or owning a digital game, and the fact that they have control over what happens to that

“It’s this idea that I’m only kind of renting a game, and in some cases the prices could be quite high for renting that game. And what we’ve seen is, especially with multi-player games, if the service isn’t making enough money, they’ll just turn it off, that game you may have invested hours and hours in is just gone.

“If you have a 20-year-old game disc game and console you can still plug it into your TV and play it, you can’t do that with streaming, and that’s what’s held them back previously.”

For many younger gamers, a key attraction to the gaming world is e-sports or competitive gaming, which saw revenues jump 38 per cent last year nudging $1 billion.

The phenomenon has seen many trade their dreams of becoming a professional footballer or popstar for hopes of becoming an e-sports star.

As a technology which involves streaming will unavoidably involve more lag than playing directly on a console, even if it’s not noticeable to the average player, cloud gaming is unlikely to appeal to this core market.

“Cloud gaming, even if most of the mainstream technical issues are eliminated, e-sports players are not going to use it,” he continued.

“These are people who will buy monitors and turn off the smoothing technology, anything that induces lagging into their gaming is not going to work. They’re going to be on the console and the PC for as long as those platforms are viable.”

“I think it is the same trajectory that ultimately, we’ve seen with physical movie sales and Netflix”

Physical gaming retailers are already taking note of the changes occurring in the gaming industry. Game and even Dixons Carphone are offering gamers a place to get together and play competitively, removing their reliance on core hardware and physical game sales.

Meanwhile the second-hand gaming market is still booming, with retailers like CEX basing their entire business model on it. As publishers are loathed to reduce the price of their games on digital platforms like Steam even after their sales have peaked, the physical second-hand market remains attractive for many, and can provide retailers with mark-ups well above first hand game sales.

Yet, in a world where it is possible to do pretty much anything with your smartphone, the prospect of effectively carrying around a PS4 (or PS5) in your pocket is one few are likely to reject, regardless of those who still favour physical formats.

What’s clear is that this technology is coming, and its down to retailers to either mitigate the potential impact on their sales or find a way to embrace and monetise it if they want to survive.

“I think it is the same trajectory that ultimately, we’ve seen with physical movie sales and Netflix,” Jackson concluded.

“Ultimately, as we’ve seen with those services, frictionlessness wins out. I think it’s down to the games retail companies to figure out what they’re going to do when this does come to power, unlike HMV they do have that lead time of five or six years before there’s a real risk it is going to put them out of business.”

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