Next-generation cloud-based gaming may change the face of the industry

Shares of Asian gaming companies were knocked by news that Google is planning to launch a cloud-based gaming platform within the year.

Microsoft also has recently outlined plans to launch trials of a game-streaming service.

Google announced that it plans to launch “Stadia,” an internet-based gaming platform at the Game Developers Conference, the world’s largest professional gaming industry event, in San Francisco.
Google CEO Sundar Pichai said Stadia will be a platform “for everybody.”

Following Google’s announcement, shares of game companies in Asia fell sharply.
Nintendo stock at one point fell close to 5% while Sony shares declined over 3%. Shares of South Korea’s Nexon affiliate Nexon GT slipped more than 2% and China’s Tencent Holdings also traded lower at one point.

Investors in these companies were spooked by the thought of more competition hitting revenues, especially as cloud gaming gains momentum. Cloud technology allows gamers to stream, rather than download, games, so they can stay online constantly. With the development of fifth-generation technologies, cloud gaming is a natural progression.

Analysts said Asia’s gaming companies, especially those focused on consoles, will have to evolve quickly to benefit from the new technology and to stay competitive. 5G networks will enable faster internet speeds as well as create a more reliable smartphone connection, with fewer delays, which will help the spread of cloud gaming and boost its popularity.

Microsoft also has unveiled a game-streaming service called “Project xCloud,” with the aim of letting gamers play high-quality video games on different devices, meaning mobile-only players won’t need to purchase expensive consoles. Last week, Kareem Choudhry, Microsoft head of gaming cloud, confirmed plans to start public trials of its service within the year.

Amazon is also rumored to be working on a similar project, while others in the industry claim that there is a possibility that video-streaming services Netflix and Hulu could become potential competitors as well.

U.K. based market research company TechNavio analysts forecast that the global cloud gaming market will grow at a compound annual growth rate of over 30% between 2018 and 2022.

If that market cannibalizes console gaming, companies like Nintendo, which registers over 90% of its sales from its video gaming platform business, which of that about 60% comes from hardware sales, would suffer.

Nintendo and Sony already face slower sales. At the end of January, Nintendo slashed its full-year sales forecast for its Nintendo Switch to 17 million consoles for the year ending March. The previous estimate was 20 million.

Sony, whose PlayStation 4 was wildly popular, too experienced a 14% drop in operating profit in its gaming business for the three months through December due to a slump in PS4 hardware sales.

Shares in these two console companies have already experienced a sharp sell-off, with Nintendo stock down more than 30% from a year ago and Sony stock falling over 20% since hitting an annual high last September.

“If cloud gaming does gain further momentum once 5G starts and becomes a success, Sony and Nintendo will definitely experience a negative impact,” noted Hideki Yasuda, a senior analyst at Ace Research Institute. “Cloud gaming could possibly herd them into changing their business models.”

Market intelligence company Newzoo, in its report titled “Cloud Gaming: The Perfect Storm,” pointed out that globally, 51% of PC and console players consider themselves casual gamers.

“This group could be the first to be motivated by cloud gaming,” due to lower upfront costs since consoles will not be necessary. “At about $400 per console and $60 per game, a casual gamer who buys three games can subscribe to a $100/year service for almost six years before their total cost equals what they would have spent on physical formats,” the report said.

The Asian gaming market accounted for 45%, or close to 5 trillion yen ($44 billion), worth of the global industry in 2017 and is still the fastest-growing region.

Hirokazu Hamamura, head of Famitsu Group which publishes magazines focused on video games, claimed that with the emergence of cloud gaming and the entry of big tech companies like Google, “game companies with a strategy focused heavily on popularizing their hardware will not be able to survive.”

While a growing number of companies move on to next-generation gaming, many others are still trying to think about how to adapt their business models to match the changing market trend. It will be a game of survival and “Asian game companies are probably trembling with fear,” Hamamura added.

On the other hand, Nexon Korea, the biggest gaming company in South Korea, downplayed Google’s plan to offer streaming game services. “It will not affect our revenue much because it is just changing platforms,” said a spokesperson for the company.

“Moreover it won’t be possible under current telecommunication system. It will be possible only when 5G speed is available,” the person said. However, the company did admit that the streaming service will be more convenient for users because they will not be constrained by the memory capacity of consoles.

China’s No. 1 video game developer Tencent Holdings has expressed interest in marrying gaming with the next-generation of telecom technology, by teaming up with Nokia on 5G technology research with the aim of opening up new services including cloud-gaming.

“5G technology matters a lot to Tencent’s core businesses such as video games and internet-connected cars,” said Zhang Yunfei, Tencent Future Network Lab director at an industry conference last year in Shanghai, as reported by Tencent News.

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