Is cloud-gaming commercially viable?

by dylan on April 5, 2011

About twelve months ago, the general consensus seemed to be that OnLive (the poster-child for cloud gaming) faced a doubtful future. Yet today, the company is still alive and has now raised $56.5M, with the most recent investment coming from HTC. Their competitor, Gaikai, (who have a slightly different business model) has raised $15M from more high profile investors. Analysts seem to be making encouraging noises. But many game developers I know continue to shake their heads. What gives?

Let’s be clear: I’m a big fan of browser-based gaming in all forms. It’s a fantastic market with a lot of room to grown. I think the PC download space is interesting but ultimately a niche business. On console, I suspect you’ll see the first download-only AAA title in 2012.

Cloud-gaming on the other hand (where players stream console/PC games from a server), is a different kettle of porpoises. Here are the primary challenges:

1. The Internet
Unlike digital downloads, streaming games require both down AND upstream communications. Any latency is going to cause trouble, particularly for real-time games. Unfortunately, the Internet is a latency-filled place. This is why OnLive has had to raise so much capital (and possibly why Gaikai only streams demos): to provide a good consumer experience, cloud-gaming services need to operate in data centres which are physically close to the gamer.  Although this is less of an issue for single-player games, overall it is not a business which scales well (from a capital perspective).

2. Cloud-gaming is not yet ‘in the game’
Game developers have long used the technical term ‘sucky’ to describe the Internet. To deal with this problem, they build a range of tricks into the game-code itself which compensate for this slowdown.  The problem for the cloud-gaming companies is that they receive the game AFTER it’s developed. Meaning that they can’t add any of their own technical wizardry into the game. These guys are going to need middleware teams.

3. Uncapped broadband is under threat
There is increasing talk from ISPs about getting rid of uncapped broadband packages. While browser gaming is relatively low-bandwidth and digital downloads consume a pre-defined amount, cloud-gaming is open-season. It’s unclear how (if at all) cloud-gaming consumers will react to ISP caps.

I am absolutely not ruling out cloud gaming as a viable model. However, I am also saying that the successful companies will need a LOT of capital and very deep technical talent. And that’s to just make it a mainstream service. I suspect the actual ROI is likely to be years out from that point (OnLive are currently charging $9.99/month for unlimited play). For now I’m betting on regular browser games.

(Credibility check: I do know a little about this space and worked with others who actually invented parts of it)

 

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