It is now simply a matter of time, but that shouldn’t be a surprise if you’ve followed this space for a while. Game revenues on traditional consoles have been falling and once powerful game developers like Electronic Arts have fallen on harder times. Sony's acquisition of Gaikai is a move that both potentially strengthens gaming in the living room and begins the process of ending the current gaming market. The gating factor will be the availability of enough bandwidth and low enough latency to make this move work and that will take a few years.
Let’s explore the beginning of the end for console gaming.
The console gaming market has been unhealthy for some time. It was prematurely made ill by the practice of game reselling which, on top of rampant piracy in some geographies like China, destroyed much of the revenue and profit associated with developing and selling games. PC gaming showed a way out early with World of Warcraft and other less popular Massive Multiplayer games where the software gradually became free and you paid for the service. It was virtually impossible to resell the software and while a shadow economy did come about surrounding paid power leveling and in game gear the firms supplying the successful titles were able to maintain revenue and better assure their profit.
However Massive Multiplayer games are more social events than pure gaming and they had difficulty capturing and holding those that wanted to just paly and not engage in social behavior. In addition you still had to run a lot of code locally which means the game company had to create a port of the specific hardware you were using. While most used Windows that wasn’t a huge problem but increasingly users are on Apple or Google products and they want to participate as well.
The Birth of Streaming
Services like On-Live and Gaikai came to market to address this. Initially as a way to easily demo games they would host these games or remote servers and then display them in a light desktop client or through a browser so the user didn’t have to download any code. The client could then be ported to different platforms and immediately all of the games available to the service would be available on the client. You could subscribe to the service and get a series of games as part of the subscription, buy or demo the games, and there were instances where you could just pay for gaming time. But the key part of all of this was that people were paying and there were no reported instances of piracy.
The issue was, however, that to make this work you needed very low latency and you needed a high bandwidth network. The high bandwidth was for the HD image you were seeing on your screen and the low latency was so that the player could keep up with the game play. Initially the issue was more latency than bandwidth but as more and more people started streaming movies after school or work carriers started to throttle services and while movies could buffer to get around the problem games can’t be buffered unless you just want to watch the aftermath of your character being destroyed while it stands unmoving.
Addressing the Console Problem
What streaming immediately addresses is the need to upgrade consoles for performance. Performance increases are handled by the service in the cloud. Users then can me dynamically moved to higher performance servers for newer games and will play on older servers for older games. There clearly is a hardware cost to the provider but it is both largely centralized and more manageable because the provider manages content. Granted if a massively popular high powered game comes out that everyone wants to play it could crater the service but the provider can delay the game until the eco-system can handle it.
If a console is anything that can run the client it can range from very inexpensive set top boxes like the under $100 system that is sold by On-Live to being built into TVs, to Tablets, PCs, and Smartphones which can run the related software client.
What else is interesting is that if you can run games you can pretty much run everything else creating a PC as a service model. OnLive announced one of those some time ago.
Wrapping Up: Sony Problem
However there is turd in this otherwise pristine swimming pool and that is services like this typically work best if they are hardware independent. You want the service to run on what you have otherwise you’ll limit your reach. For instance if Comcast bought Samsung and tied the cable and TV vendor together they would likely lose a large percentage of customers who didn’t have or want Samsung TVs, and Samsung would lose customers who weren’t on Comcast. By buying Gaikai they may have killed it and done OnLive a massive favor because OnLive will be in demand as a competitive hedge for everyone else and folks who want it will likely not buy Sony TVs and a lot of current Gaikai users will likely drop off the service when they buy new sets as it is unlikely that Sony competitors will now build the Gaikai service into their own TVs (firms rarely buy technology from a company they compete with).
So while this move does mean the consoles are done it also may limit both Sony TV and Gaikai sales in a way very similar to what happened to Nokia when they bought the Symbian telephone operating system (Nokia fell and Google picked up the old Symbian partners and eventually even Nokia abandoned it). So this Sony move may be the best thing that ever happened to OnLive. We’ll see how this all plays out.
President and Principal Analyst, Enderle Group
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