Can Microsoft Disrupt the Cloud Gaming Market?

Microsoft (NASDAQ: MSFT) recently launched a dedicated cloud gaming division led by Kareem Choudhry, a 20-year company veteran who previously worked on Outlook, DirectX, and Xbox engineering. Choudhry will report to gaming chief Phil Spencer.

Speaking to The Verge, Choudhry stated that there will eventually be two billion gamers worldwide, and that his unit's goal was "to reach every one of them." Let's take a closer look at these efforts to see if Microsoft can hit that lofty goal.

What is cloud gaming?

Cloud gaming generally refers to two types of technologies. In the first type, a multiplayer game which is installed on a gamer's PC or console remotely renders certain game assets in the cloud instead of using local hardware.

In Microsoft Studios' upcoming game Crackdown 3, the destruction of its game world -- like bullet holes and explosions -- partly relies on the processing power of Microsoft's Azure cloud platform. Therefore, players only witness the full-scale destruction of the game world in multiplayer mode, while the carnage in the campaign mode remains far more limited. Ubisoft's tactical shooter Rainbow Six: Siege also uses Azure for similar purposes.

The second type is often referred to as "Netflix for video games." With this technology, an entire game is run off remote servers instead of being downloaded and installed on a PC or console. Technically speaking, a player "remotely controls" a game, and streams the video back to the local hardware. This GaaS (gaming as a service) model provides instant on-demand gaming across multiple devices, but it requires high speed, low latency connections to provide a lag-free gaming experience.

Sony's PlayStation Now, which lets players stream PS3 and PS4 games to PS4 consoles and Windows PCs, uses a subscription-based GaaS model. NVIDIA's GeForce Now is another subscription-based GaaS platform that streams high-end PC games to low-end PCs and Shield devices.

What cloud gaming means to Microsoft

Microsoft doesn't offer a GaaS platform yet. The closest it comes to "game streaming" is the ability to locally stream games from the Xbox One to Windows 10 PCs. This approach, which faces far fewer challenges with latency, is comparable to Sony's Remote Play and NVIDIA's GameStream services. It also offers Xbox Game Pass, a subscription service that lets gamers download (not stream) a selection of games to their consoles.

However, Microsoft has been focused on creating a full GaaS platform for several years. Back in 2014, various reports indicated that Microsoft was developing a cloud gaming platform called "DeLorean" that would "predict" a user's next moves to reduce latency.

In 2015, it acquired 3D gaming physics company Havok. Last year, it bought 3D data-optimization solutions provider Simplygon. Earlier this year, it acquired PlayFab, which provides services for building, launching, and expanding cloud-connected games.

All these moves, capped off with its introduction of a cloud gaming division, indicate that Microsoft will launch a GaaS platform for Xbox One consoles, Windows PCs, and mobile devices in the near future.

But can Microsoft disrupt this niche market?

The cloud gaming market could eventually become another pillar of growth for the company's commercial cloud business, which grew its revenues 56% annually to $5.3 billion last quarter and accounted for almost a fifth of its top line.

But it would still be a tough uphill battle. In addition to latency issues, Microsoft's service needs to compete against established players like Sony and NVIDIA. Another looming rival is Amazon, which recently launched more tools for creating cloud-based games that utilize Amazon Web Services (AWS).

All these cloud gaming players must convince gamers that GaaS subscriptions are more cost-efficient than digital downloads or used physical games. PlayStation Now costs $20 per month or $100 per year, and GeForce Now costs $8 per month. This means that Microsoft needs to aim pretty low to gain market share. Microsoft would probably integrate cloud gaming subscriptions into Xbox Game Pass, which costs $10 per month.

The bottom line

Microsoft doesn't have a great track record with video game frontends. Its Windows-based game store, Games for Windows Live (GFWL), failed to counter Valve's Steam and was discontinued in 2014.

However, Microsoft is putting the pieces of its cloud gaming strategy together more carefully, and I wouldn't be surprised if it actually succeeds at creating the elusive "Netflix of video games."

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Leo Sun owns shares of AMZN. The Motley Fool owns shares of and recommends AMZN, NFLX, and NVDA. The Motley Fool has a disclosure policy.