Is Nintendo Creeping Up on Sony in the Cloud Gaming Market?

Sony's (NYSE: SNE) PlayStation Now, which streams more than 650 PS4, PS3, and PS2 games to PS4 consoles and PCs, is the most developed cloud gaming platform in the world. However, Nintendo (NASDAQOTH: NTDOY) has taken several steps into cloud gaming that raise interesting questions about the fledgling market's future.

Back in 2014, Square Enix used cloud streaming to bring its massive multiplayer online [MMO] Dragon Quest X to Nintendo's 3DS. This April, Sega launched Phantasy Star Online 2: Cloud for the Nintendo Switch, letting players access their saved games from the PS4 and PlayStation Vita.

In May, Capcom introduced a cloud-based version of Resident Evil 7 for the Nintendo Switch in Japan via a partnership with Taiwanese game streaming company Ubitus GameCloud. Players pay about $20 to rent the game for 180 days and install a 45 MB client on their Switch consoles to stream the game. Nintendo also recently announced that it would launch a cloud-based version of Ubisoft's Assassin's Creed Odyssey in Japan next month.

Why Sony should pay attention

None of these moves indicates that Nintendo will launch a PS Now competitor anytime soon. However, they highlight a major way Nintendo could challenge Sony and Microsoft (NASDAQ: MSFT) in the high-end gaming market.

Nintendo has sold about 20 million Switch consoles, according to Vgchartz, compared to 82 million PS4s and 39 million Xbox Ones. However, the Switch was only launched in early 2017, while the PS4 and Xbox One both arrived in late 2013.

The Switch boasted three main advantages over the PS4 and Xbox One. It had a lower launch price of $300, its hybrid form factor let gamers swap between handheld and home console modes (via a TV dock), and it offered first-party Nintendo games (like Mario and Zelda) that weren't available on other platforms.

However, the Switch had less internal storage and graphical horsepower than the PS4 and Xbox One, and that gulf widened with the arrivals of the PS4 Pro and Xbox One X. This meant that many high-end triple A games couldn't be launched on the Switch.

Cloud gaming offers Nintendo a solution to the problem. With cloud-based games, gamers play a game on a remote host, and the gameplay is streamed back via an interactive live video. Therefore, any device with average video streaming capabilities can play cloud-based games -- if it's connected to a high-bandwidth internet connection.

Cloud-based games on the Nintendo Switch could look just as good as their PS4 and Xbox One counterparts. Moreover, the Switch's handheld mode can let gamers play portable versions of triple-A titles on the go, then seamlessly switch back to TVs at home.

Why is Nintendo only taking baby steps?

Launching a cloud gaming platform could bridge the graphical gap between the Switch and the PS4 and Xbox One, but Nintendo's baby steps with Square Enix, Capcom, and Ubisoft indicate that it doesn't believe that mainstream gamers will embrace cloud-based games yet.

There are a few reasons why that might be right. First, most mobile connections can't play cloud games at acceptable speeds. Second, it's often cheaper for casual gamers to buy used physical games or discounted digital games instead of subscribing to a cloud service. PS Now, for example, costs $20 per month, $30 for three months (with PS Plus), or $100 per year.

Lastly, the "all you can download" model used by Microsoft's Xbox Game Pass and Electronic Arts' Origin Access (PC) and EA Access (Xbox One) might make more sense for most gamers since it simply lets them download and install an unlimited number of titles from a select library instead of streaming them from a server.

Will Nintendo eventually become a cloud contender?

Nintendo seems interested in cloud gaming, but it's letting the publishers do the heavy lifting for now. It probably won't follow Sony's lead and make cloud gaming a major priority, or fret over Microsoft's development of a rival platform which could arrive within three years.

For now, Nintendo will likely leverage the popularity of the Switch to convince publishers to produce original games, or use innovative methods -- like cloud gaming or lower-end remakes, like Square Enix's Final Fantasy XV: Pocket Edition -- to bring higher-end games to its console.

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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 has no position in any of the stocks mentioned. The Motley Fool recommends Electronic Arts. The Motley Fool has a disclosure policy.