Cloud-gaming service OnLive will shut up shop at the end of April, after a deal saw Sony acquire its patents with no intent on continuing operations. The service, which rendered games in the cloud and streamed the output to a PC, Mac or mobile device, was a direct rival to Sony’s PlayStation Now – formed after Sony acquired Gaikai back in 2012, for $380 million.
There was always a silent threat that Onlive, in its death throes, would reach for patent suits as a way of making money, especially as it was sold to Lauder Partners, an investment firm run by Gary Lauder, a long standing Silicon Valley VC player who is also Chairman of ActiveVideo Networks, the company sued Verizon over patent infringement for $260 million. It made sense for Sony to pay the price of taking that threat away if it wishes to build a business is cloud gaming.
No details of the deal have been revealed so far, but with the acquisition, Sony seems to have sewn up the cloud-gaming market. While OnLive never competed directly with console sales, except for a very brief foray with a $100 micro-console in 2010, Sony (and Microsoft’s Xbox) have long since transitioned into a business model that makes its money in software and services – not hardware.
With the OnLive patents, Sony can tie up its rivals in the cloud gaming space with legislation, or leverage them as a revenue generating mechanism for those that want to enter the market. While there are smaller cloud gaming offerings from Nvidia’s Grid (perhaps the most viable, and currently being marketed to operators as Gaming-as-a-Service on its website), G-cluster, GFACE, Playcast and Playkey to name a few, none of them have the resources on hand that Sony now controls. OnLive’s patents and Sony’s infrastructure are a formidable weapon in this fight.
Faultline has broken the model down in a free report that will shortly be available from the Rethink website, but the quick summary is that Sony and Microsoft make far more from incremental transactions than they ever do selling the necessary hardware. Our report goes on to say that cloud-based delivery would remove all if not most of the consumer hardware cost that cuts into their profits, and that for this reason the business model would shift towards app-based and screen-agnostic gaming.
This model also allows the comparatively large upfront cost of a game to be replaced by a smaller subscription. For instance, a $60 ticket price could equate to three months’ worth of access to a much larger content library. This could be an attractive proposition for a gamer, especially if the $350 cost of buying a console is also removed from the equation.
Electronic Arts has taken the first initial step towards the subscription model, but as a games publisher it is not in control of the distribution platform as it still depends on PlayStation and Xbox to get its titles in front of gamers. But once cloud-gaming becomes viable (more on that later), it can feasibly roll its IP into an applications and compete directly against Sony, Microsoft and Nintendo – which currently have the advantage of extensive content libraries themselves.
Once the catalogs of games are held within libraries, gamers could well find themselves having to take out multiple subscriptions to access a wide variety of games – a little like the current OTT video model in which multiple accounts are required to access the numerous exclusives that are used to differentiate each service against the competition.
But on the infrastructure side of things, cloud-gaming still has large hurdles to clear. While a cloud-rendered game removes the burden of hardware complexity from the gamer’s home or handheld unit, shifting it into the cloud instead, the latency of this internet connection becomes the main point of failure.
The user input must be sent from the device, itself just decoding a video stream and relaying user commands, up to the cloud, processed by the server, and then encoded and sent back to the player – all without feeling laggy and unresponsive. Nothing will be more annoying than losing a shootout (whether it’s with digital guns or soccer balls) than a server-side error in your opponent’s favor – or a sub-par internet connection.
But the latency of the connection is beyond the control of the likes of Sony and Microsoft. Instead, the capex needed to upgrade networks to support both the bandwidth and connection speed needs to come from the ISPs, who have shown themselves to be very reluctant to extensively invest in their networks, in the US at least. Network-edge hardware can fill in the gaps for poor latency or bandwidth, but the ISPs might put themselves on the sharp end of criticism from these games vendors if the latency becomes a major barrier to adoption.
Seeing Sony swallow the competition is therefore unsurprising. This generation of consoles could be the last of their kind. A suitable internet connection will remove the need to put the processing power at the network edge. Both OnLive and Gaikai worked in smart TVs, and removing the consoles from the equation opens the market up to new entrants – who only need to ship a client app to funnel access to the cloud for the user.
Cloud gaming is very disruptive, for both those in the hardware and cloud services as well as those developing the content. Sony’s own PlayStation Now service doesn’t seem to have taken off with much enthusiasm, likely due to its $20 monthly subscription – for old PS3 games, and not the new PS4 games. Like the OnLive deal, Sony hasn’t released numbers for PlayStation Now, but if it plans to revamp the service, it likely needs to either cut the price or drastically expand the library.