Microsoft’s Leading Edge in the Cloud Gaming Space
Read time: 7 minutes
Microsoft and Sony recently released the next generation of video game consoles, the Xbox Series X and Xbox Series S and the PlayStation 5, respectively. But the video game landscape has changed over the years. These two goliaths will now face increasing competition from other companies, including tech giants Amazon and Google, which have entered the fray with cloud gaming services.
The cloud will be a vital part of gaming going forward, and companies couldn’t get in it early enough. There are a lot of steps to be in the cloud space today. Companies need to understand how to build a third-party ecosystem, how to monetize it, and what models work best. Will it be a Unity-like ad-driven model? In-app purchases and ads? How much of it will be user-generated content?
Amazon and Google have deep pockets and will be around for the long haul. But as they take their first competitive steps, Microsoft looks to be the strongest and the most well positioned as a cloud company with a gaming element. Here’s why.
Microsoft has been in cloud with Azure now for about nine years, and the company’s leadership sees cloud gaming as a great source of new revenue for Microsoft. There’s also an end consumer in the Xbox space because most of Microsoft’s other businesses — other than Surface — serve large business customers.
The newly launched Xbox Series X is the heir apparent to Xbox One. It has more horsepower than any console ever created. Still, it has another edge over PlayStation 5: cloud gaming. Game Pass has been the leading subscription gaming service since its launch almost two years ago. With it, gamers pay a monthly or annual fee and get an unlimited amount of content, including new games from independent studios and older triple-A titles. It allows Microsoft to bring indies on board, and to do it in a way where it’s more cost-effective for those developers.
Then, of course, Xbox Live is the dominant gaming network globally. Even though PlayStation has beat out Xbox in terms of sales of units, Xbox Live has the most monthly active users, because it’s been building for 15 years. It offers a real social element that strongly appeals to gamers in multiple demographics.
The final piece of Microsoft’s puzzle is its cloud streaming service, xCloud. It’s built on the backbone of a company Microsoft acquired called PlayFab, formed by two former Microsoft tech folks, and it’s platform and identity agnostic. It makes it easier for developers to use the most common building blocks for games: broadcasters including YouTube and Twitch, game engines such as Unity and Unreal, and multiplayer services like Xbox Live or the mobile-based Photon.
The key here, and this is a big differentiator among all of the players in the cloud space, is it democratizes cloud gaming. Microsoft allows developers to come in on whatever they’re on — Microsoft’s stack or not — as long as they use Azure. That’s been the key focus for Microsoft for the past couple of years.
Amazon, a company born in the cloud, is the leader in cloud gaming, generating somewhere between $2.5 billion and $3 billion a year in the space. It had a huge head start, multiple years in advance of Microsoft and others. It started with all the building blocks for its tools such as Lumberyard for developers. It does create games directly, as well as work with third-party studios. Amazon recently announced Luna, its cloud gaming and subscription service that’s like Game Pass and xCloud combined. I would never count Amazon out, but it has struggled in the gaming space because it hasn’t been in it that long. Amazon is just, I think, starting to understand what it really takes to actually build out a portfolio of games.
Google launched Stadia, its cloud streaming service, in November 2019. It’s run by Phil Harrison, who used to run Sony PlayStation. Stadia users can play games on mobile devices, in browsers, or with Chromecast. Google sells a controller that speaks directly to the server, which reduces latency. With Microsoft xCloud and Amazon Luna, users use an extra device that goes through the server, so there’s an extra step that adds in more latency, even if they have a high-powered processor. Since Google is focused on the technical side, that does bode well for its future in terms of being able to showcase fast-paced games such as Fortnite or racing games such as Forza. The weakness for Google, like Amazon, is that it doesn’t have a first-party portfolio. Microsoft, Sony, and Nintendo understand how important it is to have exclusive titles that magnetize gamers to their platforms.
In the last console cycle, the PlayStation 4 outsold Xbox One and Xbox One S by about three to one. Sony was dominant in Europe and APAC, and even in North America with Xbox. That’s because Sony stuck to gaming. It didn’t try to position the PS4 as a multimedia device for the living room. Sony is uniquely positioned with a core focus on gaming, whereas Microsoft has a lot of other masters to keep happy in the Windows, Azure, and Dynamics world. Sony has a very good portfolio setup as well, with first-party titles that are exclusive for its console. I would not be surprised if PlayStation is the dominant console again.
But it has to play catch-up on the cloud gaming side. It has a good number of customers on PlayStation Network. But Xbox Live is sturdier and has not ever failed or crashed. It’s never been broken into. Sony’s had issues in the past. If Sony focuses more on the cloud side, expanding its PlayStation Now service, as it’s moving into the launch of the new console and starts to think about what it would like to do, vis-a-vis a Game Pass or subscription, how does it want to differentiate from Xbox with Game Pass? What does Sony want to do in terms of onboarding developers for cloud gaming? What will it do there with the play that we did at Microsoft for PlayFab? Sony will find answers there — those are areas of opportunity for Sony to focus on now as it starts to move into the next six competitive years.
Nintendo obviously has done exceptionally well over the past decade and stumbled a bit in between, but then was dominant for the 20 years before that. Everyone knows the company and its icon, Mario. Nintendo has done a great job of staying true to its demographic. The Switch console is a phenomenal piece of equipment. It’s at a great price point. It just works well and is beautiful. The graphics on it aren’t quite at the same level as you’ll find on Xbox Series S or PlayStation 4, but that’s by design. It’ll always be that extra console. Gamers are more likely to buy an Xbox Series X plus the Switch, or a PlayStation 5 plus the Switch, as opposed to a PlayStation 5 and an Xbox. Nintendo had record numbers this past quarter again. The Switch will end up being its best-selling handheld console of all time.
But it’s behind in cloud. Its online store is very utilitarian. It is a place where you can go and buy titles digitally, but that’s table stakes. There really isn’t a strong network or social presence on Switch at this point. It is a little harder for Nintendo, because there is a good chunk of its demographic that’s under 13, and there are certain regulations and rules for folks under 13 that it has to meet. But there needs to be more of that social element to keep folks on it. Nintendo will continue to succeed on its own, but cloud gaming is something it’ll have to push into, so it’s not left behind.
There are little battles going on in the gaming world between engine and tools companies, as well as companies that own stores. Companies that have bigger plays with consoles and subscription services also in cloud are going at each other. There has been more cooperative and collaborative efforts, like with Sony and Epic, and Microsoft with Nintendo. There are key plays getting made that will play out over the next two years. There’ll be winners and losers. Companies dominant in console sales might not be the same as those dominant with the cloud.
There are a lot of other pieces to the puzzle that will play out over time. But it’s clear that companies need to believe their main customers are developers, who are creating the content that’s meant to arouse and excite the gamers to go out and play.
About Frank Pape
Frank Pape was most recently employed at Twilio Inc., holding the title of Vice President, Global Business Development & Carrier Relations. Prior to this, Frank was employed at Microsoft Corporation, where he held multiple titles, including Head of Global Business Development, CSE, Head of Cloud Gaming, and Head of Global Apps Business Development. Prior to Microsoft, Frank held the position of Director, Business and Product Development at Electronic Arts Inc. He also worked at Activision Blizzard Inc. and was Advance Staff, White House Scheduling and Advance Department, while working at the White House.
This tech industry article is adapted from the November 10, 2020, GLG Remote Roundtable “Cloud Gaming and Cross-Platform Play — Is On-Demand Gaming the Future?” If you would like access to the full teleconference transcript or would like to speak with technology industry expert Frank Pape, or any of our more than 700,000 industry experts, contact us.
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