Is Google Gearing Up to Become a Gaming Giant?

Alphabet's (NASDAQ: GOOG) (NASDAQ: GOOGL) Google could be developing a new cloud gaming service and console according to a recent Kotaku report citing five anonymous sources. Google also reportedly plans to lure developers to a new game publishing platform, or acquire them outright.

If Google moves forward with these plans, it could disrupt the business of leading console makers and game publishers. However, investors should take this report with a grain of salt, since Google has a long history of fragmented gaming efforts.

The fragmented world of Google games

Google entered the gaming market with its Android Market app store in 2008. By taking a 30% cut of paid apps and in-app purchases (which was recently lowered to 15%), it turned mobile games into a lucrative new revenue stream.

Google eventually replaced Android Market with Google Play, a more diversified digital storefront for games, videos, books, and other content. In 2013 it launched Google Play Games, an online gaming service that added multiplayer capabilities, cloud saves, achievements, and social rankings to Android games.

In 2014 it reportedly tried to expand that ecosystem by buying Twitch, the world's biggest video game streaming platform. Unfortunately, Amazon (NASDAQ: AMZN) moved in and acquired Twitch for $1.1 billion later that year. Google tried to chase Twitch with YouTube Gaming, but the platform remains in a distant second place.

Meanwhile, OEMs started launching Android TVs and set-top boxes. Some of those products, like NVIDIA's (NASDAQ: NVDA) Shield devices, were squarely aimed at the gaming market. The idea of launching higher-end Android games on gaming tablets and TVs seemed promising, but many developers still focused on mobile devices with touchscreen controls -- which fragmented the Android gaming ecosystem.

Google then shifted its attention back to mobile devices, and its incubated studio Niantic Labs launched the megahit Pokémon Go in 2016. The game's success hinted at a bright future for augmented reality (AR) games which projected digital overlays on real world environments. That led Google to introduce ARCore, a development platform for AR games, last year.

Google's gaming efforts seem fragmented, but it actually generates more gaming revenue than many stand-alone publishers. Newzoo estimates that Google's total gaming revenues rose 32% annually to $5.3 billion last year, making it the seventh largest publicly traded gaming company by annual revenues.

Google actually generated more gaming revenues than Electronic Arts and Nintendo, which ranked eighth and ninth, respectively. Yet Google trails far behind Apple, which ranked third with $8 billion in gaming revenues last year.

A tough uphill battle

$5.3 billion accounted for less than 5% of Alphabet's revenues last year. But if Google expands that business with a cloud gaming platform, console, and publishing unit, it could become a fresh way to diversify its core business away from ads.

However, Google's plans could face some tough challenges. Cloud gaming is a fledgling market, with Sony's PS Now and NVIDIA's GeForce Now the two most established platforms. In theory, cloud gaming platforms -- which stream an interactive real-time video of a game back to the player -- can allow high-end games to be played on low-end machines. In reality, the technology remains throttled by bandwidth limitations.

Google has the infrastructure to support a cloud gaming platform -- Google Cloud is one of the biggest cloud platforms in the world, and it offers its Fiber broadband services in select cities. Tethering those services into its other cloud services, like Drive, YouTube, and Google Play, could finally create the elusive "Netflix for gaming" that cloud gaming services have pursued for years.

Meanwhile, hardware and game publishing could be much tougher markets to crack. Microsoft, Sony, and Nintendo hold a tight triopoly in console gaming, and previous attempts to crack the market with Android TV devices didn't get far. If gamers don't buy Google's hardware or sign up for its cloud gaming platform, developers won't be eager to ink publishing deals.

Why investors should be skeptical

Google often starts new projects and abandons them shortly afterwards, or launches too many products aimed at the same market. Google's gaming efforts are could suffer from the same fragmentation that plagues its social networking, e-commerce, and streaming efforts, so I strongly doubt that it will launch a coherent strategy for cloud gaming in the near future.

10 stocks we like better than Alphabet (A shares)When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Alphabet (A shares) wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of June 4, 2018

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, 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 Amazon and Apple. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Netflix, and Nvidia. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends Electronic Arts. The Motley Fool has a disclosure policy.