Game Streaming: Not Everyone Can Win

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November 14, 2019

Game Streaming: Not Everyone Can Win

The $150B digital gaming industry is poised for disruption, with key players and entrants readying cloud streamed subscription platforms that could echo the impact that services like NFLX and SPOT have had. Structural factors – e.g. processor hungry graphics, sophisticated I/O, lag intolerance, fragmented standards, etc. – that have impeded game streaming will erode with the increasing cost/performance of hyperscale datacenters, new low latency 5G networks and the eventual viability of new I/O modalities (e.g. AR, gesture controls, etc.). Serious gamers will be drawn to cloud gaming by cost predictability, convenience (e.g. no download delays, instant upgrades, etc.) and high performance for multiplayer and mobile games. Casual players will be drawn by easy onboarding/discovery, wide availability, compelling game experiences, e-sports popularity, and community networking. Altogether, expanding the universe of gamers and delivering more compelling experiences can drive 10%+ annual growth over the next decade. Cloud platform competition will be fierce with new entrants (e.g. GOOGL, AMZN and AAPL) spending heavily to gain scale vs. the console incumbents (i.e. MSFT, SNE and Nintendo). This dynamic will give leverage to developers, particularly for tentpole franchises while the traditional publishing model will lose relevance. As 5G is more widely adopted, the platforms that better exploit its potential (e.g. much lower latency, community connectedness, mobility, support for new I/O, etc.) will gain significant advantage. Cloud hosts (MSFT, AMZN, GOOGL), mobile platforms (AAPL, GOOGL), and 5G nets (TMUS) may be the biggest winners.

  • Gaming is tech constrained. Gaming demands higher tech performance than other media – e.g. razor-sharp graphics, lightning fast processing, instantaneous response, sophisticated I/O, and support for massive throngs of simultaneous players and spectators. Despite performance compromises at every step of its evolution, gaming has nonetheless grown into a $150B business – larger than books ($121B), newspapers/magazines ($130B), recorded music ($20B), movies ($136B) and within a stone’s throw of Pay TV ($265B – double counting home consumption of movies). Unlike the other media, gaming is still growing at a 10%+ pace, as tech breakthroughs have driven new engagement and new cohorts of users. Arcades gave way to home consoles and handhelds. Cartridges gave way to CD ROMs, which gave way to downloads. Standalone games are giving way to massive multiplayer online, e-sports and social communities. Each of these steps has expanded the universe of gamers and their engagement.
  • Game streaming will resolve important pain points for gamers. Other media have evolved from digital to streaming, and in each case, market structures and competitors have been badly disrupted. Thus far, the performance demands of the serious gaming market have deterred streaming, while barriers to adoption (e.g. upfront costs, steep learning curves, platform incompatibility, etc.) have inhibited casual gamers from getting serious. However, hyperscale datacenters can now deliver console level processing and graphics to remote users, sufficient for less latency sensitive titles, and the games are fully updated and load immediately, a major advantage vs. consoles or PCs. Newbies need not buy a console or a costly “gaming” PC – just a controller, if that. Subscribers can try new games without additional cost or annoying “freemium” mechanisms. Still, streaming platforms will need to offer a strong selection of games, including big franchises, to gain critical mass.
  • E-Sports and game-focused social networking will be big. More than 200M mostly young gamers have turned to upstart social network Discord to supplement their online experience with voice and text chat, message boards, and video streams. Gaming oriented streamers are some of the most popular channels on YouTube, drawing 10s of millions of subscribers. AMZN spent nearly $1B in 2014 for e-sports streaming platform Twitch – it draws 15M daily viewers to the 2.2M broadcasters on the platform, generating total traffic behind only NFLX, GOOGL, FB and AAPL. These stats are largely hidden from investors, either as private firms or buried in much bigger entities, but with an estimated audience of 380M global e-sports viewers growing at ~14% in 2019, the opportunity is substantial.
  • 5G and other new tech are wildcards. 5G wireless promises 4ms latency (vs. 40-50ms for 4G LTE and 15-30ms for fixed residential broadband) in addition to 100Mps+ connection speeds and ubiquitous availability. This could be a gamechanger, enabling superior performance anywhere and anytime and elevating smartphones as more serious gaming devices. Down the line, new I/O modalities, such as augmented reality glasses or gesture and voice controls, could spur new categories of games and draw broader and deeper engagement. These factors could shift the advantage away from the traditional console vendors and toward mobile device platforms.
  • The field is crowded. With the transformation of the rest of media as a guide, the gaming industry has been preparing for streaming. The console makers (i.e. SNE, MSFT and Nintendo) have all launched online services as adjuncts, opened digital stores for distribution, and broadened their devices to access the panoply of digital content. Their sizeable bases of serious gamers and longstanding relationships with top publishers and developers give them substantial momentum at the start. Internet platforms (i.e. GOOGL, AMZN, AAPL and maybe FB) will seek to lever their scale, reach, technical prowess, and financial resources into viable game streaming businesses. Patience will be critical. Meanwhile, publishers (e.g. EA, ATVI, TTWO, etc.) hope to use their own streaming initiatives to reduce their reliance on other platforms – we are skeptical.
  • The slog to critical mass. History shows that the internet favors media platforms that win the race to scale. We see MSFT, with its cloud prowess and console experience, as the best positioned player. GOOGL and AAPL are particularly well positioned for the fast-growing mobile game market, with subscription plans a hedge against possible antitrust rulings on their dominant app stores. SNE and NTDOY lack cloud expertise or infrastructure and will rely on partners – interesting, both have cozied up to MSFT – and at some point, a console installed base could become a burden. Meanwhile, AMZN’s Twitch is a tremendous asset, dominating e-sports with only GOOGL’s YouTube as a rival. Both companies sport enormous reach to consumers and cloud strength. Privately held Discord (gaming social network) and Steam (gaming e-tail) are increasingly dominant and will play a role in defining winners either through partnership or as acquisitions. Talented developers and franchise content will gain leverage. As for possible losers, we are skeptical that the role of game publishers will remain as robust in a streaming world. That said, the list of would-be platform leaders is far too long, and some that are starting with reason for hope will be disappointed.

The Game is Afoot

Video games are a bigger deal than the rest of the media industry wants to admit. At $150B in 2018 global revenues and growing at better than 10%, gaming beats books ($121B), periodicals ($130B), and movies ($49B in box office, another $87B in home consumption), and is gaining on PayTV ($265B but double counting the home consumption of movies) which faces an accelerating decline. Like these other media before it, gaming faces a shift to a cloud streaming paradigm, but unlike music and TV, change may catalyze new growth amidst the competitive disruption.

Much more than other media, gaming has always been constrained by tech. Initially, gamers trekked to arcades, which remained popular even as the first 8-bit home consoles gained traction. Game cartridges eventually gave way to CD-ROMs and a new generation of high-def consoles and a revolution in PC gaming that catalyzed a huge expansion of the community. Smartphones unearthed a massive segment of casual gamers looking for distraction rather than a commitment. Each wave kept the growth coming. Now, with cloud platforms and networks finally able to deliver high quality gaming without a leading-edge GPU in situ, streaming games is ready to be a thing, and after watching SPOT, NFLX and others lay waste to traditional media, the industry thinks that it’s ready.

A horde of contestants is at the starting line. The console kings have a bit of a head start, each with 10s of millions of gamers already in well-established online communities. SNE is the biggest, MSFT has the cloud bone fides, and NTDOY has Mario, Zelda and Pokemon. Internet royalty also eyes the prize. GOOGL has announced Stadia, has a huge gamer ecosystem on YouTube, and can lever Android and Play. AAPL has Arcade and big revenues from casual games on the App Store. AMZN spent nearly $1B on e-sports video streamer Twitch in 2014 and is reputedly working on its own game platform. Facebook hasn’t announced anything, but game install ads bring in big revenues and it did buy the Oculus VR game platform. Game publishers EA and Ubisoft have announced their own subscription cloud services, although Ubisoft appears to be hedging with an alliance with GOOGL’s Stadia.

Meanwhile, interesting developments loom on the horizon. 5G wireless networks promise 4ms latency, not just a magnitude improvement over 4G LTE but also a 4-7x improvement over fixed residential broadband. This is a HUGE benefit for cloud gaming and a major driver for 5G adoption. At the same time, we expect new I/O modalities, such as AR displays and gesture controls, to enable very new gaming experiences to the mass market. These innovations will be major wildcards and the platforms that best incorporate them will gain significant advantage. Right now, none of cloud wannabes have articulated strategies for any of this.

Who then are the winners? Streaming video has driven piles of cash toward proven auteurs, and we expect creators in the video game space to extract the same leverage from what should be vicious competition amongst rival cloud platforms. Either as distribution platforms or hosts, the big hyperscale operators (i.e. AMZN, MSFT and GOOGL) will gain from a shift to cloud gaming – SNE and NTDOY could look for partners. GOOGL, AAPL and Tencent will likely continue to dominate casual gaming – the fastest growing segment – unless pending legal challenges break their stronghold on distribution. 5G and I/O innovation will shake things up 3-5 years down the line, but it is too early to pick favorites.

Games and Tech

Video games are defined by technology. While computers, smartphones and the internet have dramatically changed the way we read, listen and watch books, music and movies, at the core, the human process is still the same. Video games are not digital analogs of board games and card games, they are something new and different altogether.

The first video games seem shockingly primitive to millennials. Pong began as an arcade console in 1972, a novelty to break up the lines of pinball tables, beckoning teens to cough up quarters to keep a glowing “ball” from running off the sides of a black and white screen using a simple dial to move a small “paddle” up and down to block it and send it in the opposite direction. Simple as it seems, that was more or less state of the art for the computers of the day (Exhibit 1). By 1975 Moore’s Law had driven the cost of the electronics low enough so that Pong could be built in a home version. Still, the arcades – where throngs of kids could keep a console game, that might be the size of a small fridge and cost thousands of dollars, swallowing quarters for hours on end – were where the action was.

The ‘80’s were the golden age of arcade games. Legends like PacMan, Donkey Kong, Space Invaders, Missile Command, Asteroids, and Galaga pushed the envelope with rapidly improving graphics and more

Exh 1: A Timeline of Major Events in Evolution of Gaming – from 1970s to 2020

Exh 2: Historical Trend in Gaming Sales by Category, 1970 – 2018

sophisticated game play. Meanwhile, the first consoles with changeable game cartridges hit the market with rudimentary 8-bit graphics but the convenience of home. By 1994, when the first Sony PlayStation hit the stores, arcades had begun a long, slow decline. The PlayStation raised the ante on consoles, buffing to a 32-bit processor, a high-end GPU and ditching slow proprietary cartridges with games on CD-ROM. Over nine years, the PlayStation 1 sold more than 100 million units (Exhibit 2, 3, 5).

The new millennium saw the rise of PC gaming, as the console market plateaued about 2005. Souped-up gaming rigs with high-end CPUs, ultra-fast GPUs, and performance-minded peripherals, pulled in developers. Streaming video outlets began featuring high-level matches in the most popular games, driving further enthusiasm amongst even casual gamers. Close on this, the 2006 launch of the iPhone spurred a new market for casual games meant not for high level competition but for filling time. These mobile games, paid for via download fees, in-game upgrades and ads, went from zero to $60B in a bit over a decade.

All in – in arcades and on consoles, PCs and smartphones – video games are now a $150B market growing at better than 10% per year. Still, technology forces major compromises. For fast-twitch games where response time is critical, network lag demands that gamers stay local on their consoles or PCs, making it impossible to play in geographically dispersed groups. Moreover, downloading these games takes 15 minutes or more, even the most capacious hard disks fill up very quickly and load times at the start of a session are a bitter complaint. Console and PC games often run to $60, plus added charges for “downloadable content”

Exh 3: Mobile gaming has driven majority of growth in the past decade, 2011 – 2018

Exh 4: Summary of Key Factors Limiting Wider Adoption of Gaming

Exh 5: Snapshot of Global Gaming Sales by Geographic Segments, 2019

(DLC), loot boxes that improve the likelihood of winning, and other enticements. Console platforms also have long upgrade cycles, making it difficult for developers to take advantage of advancing hardware specs without leaving out swaths of their user base. Casual gamers are inundated by app install ads for games that are too often disappointing (Exhibit 4). Discovery is a challenge, as are the obvious limitations of a smartphone platform – a modest CPU and GPU, a small screen, limited input mechanics, slow connections, and unpredictable network performance. For new potential casual gamers, onboarding is daunting, and developers often eschew sophistication for ease of use.

Islands in the Stream

Text and still images were the first things up on the internet and books, newspapers and magazines bore much of the early brunt as consumers began spending more time with their computers. US newspaper circulation peaked in 1992 and ad sales peaked in 1999 – and nearly made it back to that level by 2006, when the bottom fell out and newspaper revenues dropped 60% in three years. The music industry was next. CD sales peaked at 943M units in 2000 and held above 700M units until 2005, when the pain of iTunes and other MP3 downloads began to hit hard. Just when sales began to stabilize at around 250M units in 2010-2011, another sledgehammer hit, as streaming services picked up steam. Today’s recorded music industry sales are a fraction of its former size.

Exh 6: Key Elements Driving a Paradigm Shift in Gaming

Now TV and movies are front and center. Movie box office receipts have stagnated in developed markets and PayTV revenues have turned down as streaming services, like Netflix and Google’s YouTube generate better than 25% growth in revenues on more than 50% YoY growth in the total hours viewed by users. The launch of Disney+, Apple TV Plus, HBO Max, Peacock and other competitive streaming service seems a final judgement by the media industry – traditional linear TV is done for.

With this background, the gaming industry has waited with trepidation (Exhibit 6). The technical limitations of broadband networks and cloud datacenters had precluded streaming for all but the simplest games, but technology has been making steady progress. While the most lag sensitive shooting and fighting games are still out of reach, other categories now perform well online. Moreover, streaming resolves many pain points for serious gamers – no 15 minute downloads, no need to free up disk space, no pressure to upgrade CPU/GPU for a new game, no wait to boot up a game, no need for your friends to be in the same room, and so on. The massive success of Epic Games’ Fortnite, a multiplayer shooter hosted entirely on the AWS cloud, seems to have shaken the industry from its torpor, as subscription-based streaming is now item one on every company’s strategy.

Of course, the leap is not without risks. Moving to streaming changes the revenue model, taking one-time purchases and spreading them over the length of the subscription – console makers will miss the bump from a new device introduction and game publishers will get paid per play by the platform rather than in a $60 upfront transaction. In other cloud-based markets, from music to business software applications, this has led to major revenue disruptions and openings for new competitors. It is also true that some categories of high-end video games – e.g. shooters and fighting games – are so sensitive to lag that even 15ms of added delay would put off serious players. Still, not moving quickly enough is likely a greater risk than jumping the gun, as new streaming-only players may take too great of a lead with early adopters for late entrants to make up – music publishers can only stare enviously at Apple and Spotify, while TV networks are scrambling to stay relevant vs. Netflix (Exhibit 7).

Exh 7: Gaming is preparing for subscription transformation like Media

The Race is On

Sony was first out of the box with its PlayStation Now streaming service, launched in 2014. However, a muddled marketing message (many gamers perceived Now as a downloading service rather than streaming) and inconsistent support for top titles has left it with less than a million subs and a relaunch of the service at a much lower price. Interestingly, Sony will be partnering with Microsoft’s Azure cloud service as the infrastructure for Now. Microsoft had also dabbled in streaming on its own Xbox Live online community and subscription downloads with Xbox game pass but has doubled down with the recent Beta launch of xCloud, which enables Android smartphone users to play four of Microsoft’s internally published games off of the web with a Bluetooth-attached controller (Exhibit 8). One presumes that after testing, the library will expand considerably and that Apple users will be invited to the party. Finally, Nintendo is dragging its feet a bit on streaming, having recently had a huge hit with its portable Switch console which easily fits in a backpack and can sling games onto a TV. Presumably, a streaming service that could put Mario World on a smartphone could undercut sales. Still, Nintendo has also acknowledged the gorilla in the room and, reportedly, has been talking with Microsoft Azure about hosting a service on that platform.

Exh 8: Top Cloud Gaming Participants and their related Product Portfolio

The publishing houses also want in the streaming game, but without undercutting their revenue streams. Subscribers to console streaming services will have to pay up for new AAA game titles, although publishers may negotiate to make older content available as part of the base price. Electronic Arts and UbiSoft have announced their own subscription streaming services including their best content but at fairly hefty monthly fees.

Meanwhile, the internet giants are licking their chops (Exhibit 9, 10). This Christmas, Google’s Stadia will let consumers buy top end games and play them from the cloud with an Android App, a Chrome browser or a Chromecast and a wireless controller. Eventually, Stadia will add a library of content available free with subscription, and likely will fund the development of exclusive titles – similar to Microsoft’s strategy with its original high-profile Xbox launch with Halo. Apple is taking a different approach, negotiating exclusive game content for its Arcade subscription service and distributing them by downloads rather than streaming. While the service supports Bluetooth game controllers, by description the games seem much more focused on casual players looking for cost control and improved game discovery than on the serious gamer market.

Amazon is reportedly working on its own game streaming service and it has obvious assets to bring to bear. The company bought the game focused streaming video service Twitch in 2014, taking the lead in distributing e-sports (competitive video gaming) feeds and establishing connection to most serious gamers. AWS is the largest cloud-hosting platform on the planet. Prime already bundles video streaming with a roster of other benefits and its retail platform is a dominant channel for physical copies of games. We suspect that Amazon might follow the Prime Video playbook – include a basic level for free with Prime membership, then try to develop exclusives to drive wider adoption.

Exh 9: SSR Scoring of Leading Cloud Gaming Platform Players on Critical Criteria

A Great Time to Be an Independent Developer

Streaming video is making the top writing and production talent rich. Shonda Rhimes (Grey’s Anatomy, Scandal), Ryan Murphy (Glee, American Horror Story), Kenya Barris (Blackish), and David Benioff and Dan Weiss (Game of Thrones) have all signed 9 figure production deals with Netflix. AT&T’s Warner Brothers has deals with Greg Berlanti (Riverdale, The Flash, Arrow), Mindy Kaling and others. Disney, Apple, NBC-Universal and Warner Brothers are all said to be courting superstar producer J.J. Abrams (The Avengers, Star Trek, Star Wars, etc.) who will command the biggest deal of all once his current arrangement with Viacom Paramount expires.

Gaming will likely follow the same script (Exhibit 11). The top game designers generally get snapped up by the top publishers – e.g. the in-house studios at Sony, Microsoft and Nintendo, EA, Activision Blizzard, Take Two, UbiSoft, Square Enix, and others – who buy their independent game companies. The rise of streaming game services would expand the market for this talent, enabling them to negotiate better deals or monetize their work without needing to sell out entirely (Exhibit 12). For example, superstar developer Masahiro Sakurai created two of Nintendo’s tentpole franchises – Kirby and Super Smash Brother. He would be worth hundreds of millions of dollars on the open market.

This will drive up costs, not just for streaming services but for traditional game publishing as well. Like the movies, blockbuster franchises – Mario, Call of Duty, Halo, etc. – are the most valuable currency and

Exh 10: Summary of Positioning and Risks for Top Cloud Gaming Platforms

keeping them vital and evergreen is a critical task. Finding the next tentpoles is even harder, and in a market where players need not buy a new console to change platforms, it’s likely the secret sauce that will make or break a streaming service.

Exh 11: Content spending in the Media space has exploded after streaming wars

Exh 12: Financial and Valuation Snapshot of Top Game Dev & Publishing Stocks

E-sports and Social Networking

The viewing audience for online video game broadcasts is estimated at about 380M worldwide, with almost half of those considered enthusiasts. Collectively, this base is growing at about 14% per year, and Amazon’s Twitch, the most popular platform for game streamers is reported to serve over 1 million active viewers at any given time. Collectively, gamers are expected to have watched nearly 7 billion hours of e-sports content in 2019. This will generate nearly a billion dollars in subscriptions, advertising, sponsorships and rights fees, revenues that are growing at a better than 30% pace. The biggest beneficiaries are Amazon and Google, which dominate e-sports broadcasting, along with popular players like Ninja or Zero who can make millions in subscriber fees and sponsorships. In contrast, PayTV, which relies heavily on traditional sports to maintain their connection with viewers, have largely ignored this budding phenomenon (Exhibit 13, 14, 15).

Similarly, gaming-focused social networking is pealing engagement, particularly in the younger demographics, from Facebook, Instagram and Spotify. Privately held Discord offers voice conferencing, chat, messaging, and open discussion in “channels” created by users either for private communications amongst groups or for followers of gaming personalities who will sponsor forums for their fans or by publishers who create “servers” for players to communicate about specific games. Launched in 2015, Discord reported in May 2019 that it had reached 250M active accounts, that 56M users posted messages at least monthly, and that it received more than 850M messages per day, with volumes nearly doubling YoY on these metrics. We believe Discord is very well positioned to exploit the rise of cloud gaming, potentially as a platform for group gaming.

Exh 13: US eSports in gaining critical mass, set to reach 50M viewers by 2025

Exh 14: Avg. Weekly Hours Spent watching Sports – Younger Generations spend equal amount of time watching Video Games and Traditional Sports

Exh 15: Avg. Quarterly Hours Streamed on Leading Game Streaming Platforms

Another private company, Valve Corporation and its service Steam, is also a critical element of the emerging cloud gaming ecosystem (Exhibit 16). Steam is the leading distribution channel for PC games and offers platform software for independent developers to incorporate capabilities like rights management, user authentication, in-game purchases, etc. to their games. It also designed and markets a line of computers with a proprietary gaming optimized OS along with other high-end gaming hardware. Developers have noted elements within Steam’s code that suggest that it is likely working on its own cloud streaming platform, a move that would be sensible given its strong position in game distribution. Still, Valve does not have the datacenter assets to handle hosting such a service itself, so expect a partner like Microsoft or AWS.

Exh 16: Active User Base of Top Internet Platforms and Gaming Properties

Exh 17: Average Concurrent Viewership Growth on Twitch, 2012 – 2019E

Casual Gaming

While most of the hand wringing in the gaming community relates to “serious” console and PC games, the growth has been coming from casual games on mobile platforms. Mobile game revenues have gone from zero to $60B in 12 years, now generating 45% of industry sales and all of its growth (Exhibit 18, 19). The biggest beneficiaries of this have been Apple and Alphabet, which take as much as 30% of upfront fees, in-game purchases and advertising in exchange for making the game apps available in their respective stores, and Tencent, which has similar control in China through its WeChat platform (and via the growing stable of game developers that it has acquired). There are more than 800K games in the iOS AppStore (presumably a similar number on Google Play) and while games account for just 10% of app usage by smartphone owners, they reputedly account for about 80% of AppStore revenues. We note that Apple’s AppStore stranglehold on iOS game distribution is facing an antitrust challenge in US courts that could disrupt its dominant position (and effectively Alphabet’s in the process).

With nearly a million games to choose from, discovery is a substantial hurdle for individual game makers. App install ad spending is expected to top $50B this year, accounting for nearly 20% of Facebook’s revenue, most of that likely from games. This is what Apple Arcade and Google Play Pass aim to disrupt, offering a wide selection of ad-free games at a predictable monthly subscription price. Even if the courts force open app distribution on mobile platforms, subscription-based gaming might transition much of the fees earned from gaming into a more defensible product. Moreover, the future could bring higher priced tiers with

Exh 18: Casual Gaming on Mobile Platforms has been the biggest growth driver

Exh 19: Audience is gathering for Gaming events beyond “Gamers” and “Players”

Exh 20: A look at Cloud Gaming Ecosystem Participants and Categories

5G and Other Wildcard Technologies

Gaming is likely the killer app for the 5G wireless standard. As noted above, mobile games are a $60B business today on 4G and 3G networks. 5G promises a dramatically better experience. Latency, a measure of the lag between a signal and a response, on 4G LTE averages more than 40ms. 5G is designed to reduce latency 10-fold to 4ms or less. This is impressive, even compared to fixed residential broadband networks where latency ranges between 15 and 30ms. For streaming games, this is a huge difference. Console games typically operate at 60 frames per second, while LTE manages about 25 fps and cable modems about 40 fps. Streaming on these networks would introduce unacceptable lag for fast twitch fighting and shooting games, but 5G could be a game changer (Exhibit 20, 21).

Even for casual games, low latency and high bandwidth opens new possibilities. Augmented reality, where objects might be interpolated into a user’s line of sight, could be served from a cloud datacenter rather than a smartphone enabling MUCH richer graphics and analysis of the field of view. While we believe mass- premium content or other forms of monetization, while attracting a new audience of casual gamers that had been intimidated or frustrated by the process of finding appropriate apps.

Exh 21: 5G networks will offer the latency and bandwidth necessary to deliver real-time speeds for Cloud powered gameplay

market appropriate AR glasses could be 5 years or more away, 5G will be widely available ahead of that to grease the skids for developers. We expect most major economies to have 5G networks widely available by 2022 and for a majority of smartphone users in those markets to have transitioned to the technology by 2025.

Mobile games also suffer from input/output limitations. Smartphone displays are too small, and touchscreens are too inaccurate and unresponsive for complicated. New input and output modalities for devices – gestures, spoken commands, smart earbuds, wearables, etc. – could be incorporated into successful casual games for mobile. The ability to play a satisfying game without using both hands could be a major advance in driving greater engagement. It is also getting easier to use a smartphone to control a large screen TV. This too will aid in the adoption of mobile gaming (Exhibit 22, 23).

Exh 22: Innovative tech can be combined to create new gameplay experiences

Okay, Who Wins?

Streaming interactive video games is an enormous technical challenge, much more so than video distribution where lag is relatively unimportant. Sony found this out after five years of trying to offer a streaming product and has turned to archrival Microsoft to host its newest service on the Azure platform. We expect cloud gaming to grow steadily, adding to the overall market growth even while gradually eroding console, PC and mobile game play. This is a big win for the big three cloud hosts, Amazon Web Services, Microsoft

Azure and Google Cloud Platform, all of which have major internal game streaming plans and budding relationships with other gaming companies. Of these, Microsoft – which already has a vibrant Xbox community, exclusive flagship game franchises, and third-party partnerships with Sony, Nintendo and others – stands out. xCloud has already launched in trial and has bone fides with elite gamers from its many years with the Xbox.

Google is perceived as a newbie but brings extraordinary technical chops to the game. The Stadia service, viewed with a bit of skepticism by many in the gaming community, is bringing an impressive list of games to its launch. It also has the advantage of the massive installed base of Android users shopping in its Play Store. Amazon hosts the Epic Games streaming blockbuster Fortnite, the Discord communications app and partners with Steam on deploying streaming technology. It also owns Twitch and is a major distributer of

Exh 23: SSR Estimate of Global Gaming Sales, 2019 – 2025E

games through its e-commerce platform. It would be surprising if it didn’t join the party with its own streaming platform. Both are likely to have the patience to stick it out through the early market development phase.

Game publishers are at risk, although the pain will take years to play out. The value of top game franchises tends to deteriorate with time without significant ongoing investment. Development talent will be more expensive and publishing houses like EA, ATVI, TTWO and others will control less of it in a world with multiple streaming outlets willing to negotiate for direct distribution. The two non-cloud owning console players, Sony and Nintendo will also face a lot of pressure as streaming obviates the need for new gamers to buy a console as an entry point. Of the two, we favor Nintendo, which has the most valuable franchise content in the industry and a track record of innovation.

As 5G rolls out, we see game streaming as a killer app, given the standard’s superior standard for latency. In the US, we believe T-Mobile, once it has completed its merger with Sprint, as a major beneficiary. In this context, we also see Apple and Alphabet having an upper hand in game distribution for 5G users given their dominance of Apps. Of course, the outcome of the federal suit against the Apple AppStore is a key wildcard. At the same time, we see services like Apple Arcade and Google Play Pass as potential alternatives should the court decision go against the AppStore.

While it is likely that a major winner or two from amongst streaming subscription services will emerge, it is too early to make the call given the number of players at the starting line and the market development hurdles that must be passed (Exhibit 24).

Exh 24: Summary of Winners and Losers in Cloud Gaming

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