Viewing and listening habits have changed significantly in the last ten years. Consumers have been shelving CDs, DVDs and scheduled programming for subscription entertainment services like Netflix and Spotify, which are streamed online from huge warehouses of servers.
After a slow start, the video game industry is catching up with the rest of the entertainment sector.
According to technology research firm Omdia, the global cloud gaming market will grow from around $1 billion in 2020 to $12 billion in 2026.
Media consultants and analysts say the growth is due to greater consumer demand and increased investments from the main console makers – Microsoft, Sony and Nintendo – looking to expand the reach of their games. They also point to the impetus provided by a rapid proliferation of internet-connected devices and the rollout of fifth-generation, high-speed 5G mobile networks.
Early predictions that cloud gaming could be a “console killer” were wrong. In fact, cloud gaming diversifies revenues for console makers and helps them reach new customers. “Ironically, it’s the console makers that are driving the cloud [gaming]’ says George Jijiashvili, senior analyst at Omdia and gaming expert.
Cloud gaming expands the appeal of video games by increasing the number of devices that games can be played on, including not only consoles but also smartphones, tablets, PCs and smart TVs. All that is required is a decent internet connection.
“It’s similar to Netflix’s business model,” says Jeff Youssef, partner and media executive at Oliver Wyman, a consulting firm. Another benefit could be gathering better data about customers, he adds.
Services range from free with the option to pay for additional features, to $10 or more per month for new premium games and a larger game library. Customers can also download games to consoles.
Microsoft’s Xbox is the clear leader in cloud gaming, according to Jijiashvili, helped by the popularity of its console and its large cloud computing business, Azure.
According to Omdia, Microsoft and Sony accounted for almost three quarters of the total revenue of the cloud gaming market by the end of 2021.
In April, Microsoft chairman and CEO Satya Nadella said more than 10 million people streamed Xbox games.
The next tech growth markets in cloud gaming
Countries to watch 2022-2026
South Korea Outstanding in both esports and the Metaverse, thanks in part to government support. Many developers are now focusing on play-to-earn formats where players can accumulate cryptocurrencies.
US The largest console market and the source of most gaming innovation since the industry’s inception.
China China vies with the US for the largest total gaming market and is the clear leader in mobile gaming revenue.
Japan Japan, a console stronghold, is beginning to turn to mobile gaming, with annual revenues from the latter set to be 40 percent – $6.5 billion – higher in 2026 than in 2022.
SSource: FT Omdia Digital Economies Index
Meanwhile, Sony, which makes the PlayStation console and was the first major console maker to offer a cloud gaming service, says cloud gaming “remains a critical part of our overall business strategy.” Its customers can stream hundreds of games through PlayStation Plus Premium service for $17.99 per month.
As the market grows, console makers are increasingly facing competition from dozens of startups offering subscription cloud gaming, as well as game developers and tech giants. Both Amazon and Google have cloud gaming services, though Google is set to shut down early next year, while Netflix’s VP of gaming said the company is considering launching a cloud gaming platform.
According to Omdia, the US is by far the largest market for cloud gaming, followed by China and the UK. According to Jijiashvili, the US market for cloud-enabled game subscription services is nearly five times larger than China in terms of revenue.
China’s gaming companies are stepping up efforts to expand overseas by acquiring Western gaming companies and collaborating with hardware manufacturers. The expansion comes as the domestic market has slowed due to regulatory restrictions on the industry.
In August, Tencent Games, part of technology company Tencent, until recently China’s most valuable company, and Switzerland-based computer peripherals maker Logitech announced that they were partnering to develop a handheld device that ” multiple cloud gaming services”.
Cloud or Console?
The perfect video game is a subject of endless debate. However, some types of games, such as adventure and role-playing games, are better suited to cloud play, says Omdia’s George Jijiashvili.
This is because they’re less dependent on the rapid “twitch” reactions required for “shooter” formats, where there are millisecond delays between pressing a button on the controller and a shot or punch occurring on the Screen lands or misses can ruin a game. Such “lagging” has been one of the most common complaints about cloud gaming.
Currently, graphics in console games are superior to cloud games, experts say. But that may change as developers start making games specifically for the cloud, rather than importing console games.
Such “native” cloud games could take advantage of the cloud’s superior computing power and allow hundreds or even thousands of people to play the same game simultaneously, says Phil Eisler, vice president and general manager of GeForce Now, a cloud gaming service from Nvidia , which also makes the hardware to process the graphics in video games.
We’re not there yet, but there will be a “tipping point” where cloud-native games will outperform console games, says Blacknut’s Olivier Avaro.
Initially, China’s cloud gaming services were mostly focused on the domestic market, sometimes bundled as a service into the county’s 5G network. “You could look at some of China’s early attempts at cloud gaming as adding value to its 5G adoption,” said Neil Barbour, research analyst and gaming expert at S&P Global Market Intelligence, a financial information and technology provider.
A key question for all cloud games companies is whether they should seek to increase their revenue through increased advertising.
With mobile phones, it’s become the norm that ads often block gaming features, says Stephen Bradley, managing director of Deloitte Consulting and gaming market expert.
But with paid “premium” games, there is “more resistance” to advertising among customers, he says.
Even if gamers are willing to accept more advertising for free or cheaper games, experts doubt whether advertising for streamed games will become as important as for television or music. “I don’t think advertising can offset the full cost of the cloud,” said Olivier Avaro, founder and CEO of Blacknut, a French cloud gaming service.
The sector is expected to grow steadily over the next decade, fueled by 5G, smart TVs and “casual gamers” who want more flexibility in how and where they play. However, it’s unlikely that cloud gaming will replace consoles any time soon – if it ever does.
“It’s very early for [cloud gaming]says Jijiashvili from Omdia. “It’s becoming more and more important [and] will coexist with the console.”