Cloud Gaming: Which Business Model?

Cloud gaming is currently a hot topic within the videogame industry, not because of the revenues it currently generates but because of all the questions it raises for the future. Beyond the usual issues around technology –that will be solved sooner or later- the discussion about the business model emerges: will the new value chain leave a sufficient margin to publishers who invest tens of million dollars to develop HD games? Or is cloud gaming meant to profitably stream only social/casual games and older IPs?

In our frictionless world, users show less patience in accessing games. Wait for downloads and installations to complete before getting in the game is a barrier. Until recently, the technologies haven’t existed to tackle the problem of instant access head-on. With the cloud, games are physically run in a remote server center and then beamed via video stream to game players through broadband. Since games are never downloaded or hosted locally, system requirements are minimal. All game patches and updates are handled on the server side, and, perhaps most important, purchased games can be saved to the cloud, enabling instant continuation of play from any location, on potentially any platform. Cloud gaming through digital streaming technology delivers the ability to play video games without a high-priced console or game-enabled PC.

In the next future, bandwidth requirements should remain the main barrier for cloud gaming, for which a 5 Mbps connection is recommended and 3 Mbps minimum speed required at all times. And this may go up to 8 mbps for HD-games. A study conducted by speedmatters.org in December 2010 found that as many as half of the broadband connections in the US fall under the 4 Mbps threshold, with the average speed being 3.0 Mbps. However cloud gaming solutions have been deployed on the web where they may become a potential competitor to Download To Own and now on IPTV, specifically in France where all four operators now have a cloud gaming offer.

The threat –or the opportunity- is that IPTV cloud gaming may become an alternative to consoles in the future; this is most probably one of the reasons why Sony took over Gaikai earlier this year. At a time when gaming has become truly mass market, IPTV operators need to stream games to their subscribers on top of all the content they already offer.

Even though the cloud gaming business model is not clearly established yet, it seems that the revenue share model under which cloud gaming services operate is not dissimilar to the one in use with feature phones: a third for the games publisher (who brings the game and the IP), a third for the technology provider (who pays for the technology and the servers) and a third for the carrier who pays for the marketing, the billing and the bandwidth). The –not to be discarded- fixed cost of porting the games comes on top and may be bore by any of the partners.

Whether games are offered in packs through subscriptions or sold on an individual basis on demand, prices won’t exceed full retail prices. As a consequence, net revenues to publishers are lower for the same games. If IPTV cloud gaming brings incremental revenue, it may represent a business opportunity. Otherwise, it is a sheer loss. It may sound as an attractive offer to casual ubiquitous games, third tier IPs and older games but what about recent chartbusters? How may next-gen games publishers make a living with a 30% revenue share on lower price points in a business that may potentially replace their main source of revenue? 

This is why it will be difficult for IPTV cloud gaming operators to include top HD games within their current revenue share model. In return, this is where console hardware vendors may have an opening: if their –still to be announced- cloud gaming service allows for publishers to keep for themselves the same gross margin they currently generate through retail, they will be in a position to offer an attractive and unique range of innovative games to their audience that nobody else may challenge.

In return what will happen if IPTV cloud gaming providers adust their business model? The cumulated reach of the Verizon, Comcast and Vodafone of this world is incomparable and could give next-gen videogames a potential audience they never reach before.