Esoterica has been very vocal in the potential of cloud gaming in the wake of Google's announcement of Stadia and Microsoft's unveiling of its ambition with xCloud. With the help of 5G, cloud gaming is expected to expand access to more titles, potentially enable cross-platform play, and reduce cost barriers. As such, cloud gaming technology could help gaming steal more market shares (spend-time) from other entertainment media (e.g. TV). That's the key tenet of our thesis that cloud gaming could be one of the major beneficiaries of 5G.
However, we saw too much emphasis on the technological advance of cloud gaming, which might be misleading when evaluating the true winners as well as where the new growth actually comes from. To be fair, we don't deny the significance of could gaming technology: it will be the first time that gamers don't need to rely on local processing and rendering, have access to computing capacity that is many times more powerful than they could ever afford. But we think that benefit is only incremental in terms of expanding the gaming pie.
We doubt cloud gaming will magnificently grow the user base of AAA games. Playing AAA, hard-core games needs rich skills and engagement. Cloud gaming won't change that. Having access to what kind of hardware isn't the problem here. There is a reason mom doesn’t play Call of Duty on Xbox when Alex is at school but does play Candy Crush.
The cost-benefit of cloud gaming isn't very clear. First, the cost of the console has been decreasing (roughly only $300 for a pretty good bundle of games these days). Second, to play cloud gaming, you need a much better Internet connection with a not inexpensive upfront hardware setup (e.g. it takes $140 to play on Stadia).
Video games are no different from other entertainment media. What matters to the bottom line is to capture as much as leisure time from as many people as you can. People want to pass time in different places, at different times, to different degrees, and with different levels of engagement. That's exactly what cloud gaming can provide. Matthew Ball said it very well here and we simply repeat.
"It’s the creation of real-time, interactive and persistent digital worlds that offer players (or “users”) a sense of individual personhood and physical presence. For this type of experience to work, it needs to be accessible from any place, on any device, with any input, and without latency – and with much of this experience managed and operated live in the cloud.....this sounds like a somewhat fantastical abstraction as we don’t really know what this will or won’t do, why it’ll be fun, how it’ll work or even what it might look like."
"The benefit of cloud gaming, at the end of the day, is going to be in the types of content that could only be created via the cloud – the same way there was value to the types of games that could only be created on console versus arcade, or touch screen versus console. And this has always the case in media."
For investors, here is the real question, which publisher(s) could deliver that?
Esoterica's statements are not an endorsement of any company or a recommendation to buy, sell or hold any security. For full disclosures, click here.