When NVIDIA (NASDAQ:NVDA) launched the Shield handheld gaming device earlier this year, one of the most exciting features was the ability to stream games from a PC directly to the Shield. This allowed gamers to play their PC games -- as well as Android games -- on the device, differentiating the Shield from smartphones and tablets.

NVIDIA has now taken this technology a step further by launching a beta test of a service called GRID. This is confusingly the same name used for NVIDIA's virtualized graphics platform, which can be used for other applications besides gaming. Competitor AMD (NASDAQ:AMD) offers a similar platform, but they don't run a service like NVIDIA. GRID allows the Shield to stream PC games directly from an NVIDIA data center over the Internet, thus removing the requirement of owning a gaming PC in order to play PC games. While this is currently just a test, GRID could have some big implications for the gaming industry, although Electronic Arts' (NASDAQ:EA) recent cloud-related troubles could mean that cloud gaming isn't ready for prime time.

The potential of GRID
When the Shield was first released, I didn't think too highly of it. It seemed like a niche device which would garner a niche audience, and I assumed that NVIDIA was just trying to showcase the power of its Tegra 4 mobile processor instead of actually competing in the handheld market.

GRID could be a game changer. When it first launched, Shield was really no threat to the incumbent handheld consoles from Nintendo and Sony. But with PC-quality games, Shield could completely change the handheld market.

It's also possible that GRID could expand to more devices, such as phones, tablets, and even PCs without dedicated graphics cards. NVIDIA could someday offer some sort of subscription service, sort of like a Netflix for games, which would allow people to play graphics-intensive games even on any hardware.

This is all speculation, of course, but the potential is there. NVIDIA's rival AMD is also trying to break into the cloud gaming market with its own line of graphics cards, the Sky Series, aimed at that purpose. AMD has partnered with other cloud gaming providers, such as CiiNow, but none of these services have reached any sort of widespread adoption.

We're in the very early innings of cloud gaming, and it's hard to say how things will shake out a few years down the line. Both NVIDIA and AMD are positioning themselves to take advantage of these opportunities, but only NVIDIA is taking the initiative of launching its own service.

The problems with cloud gaming
Cloud gaming doesn't come without problems. First, building a cloud gaming service requires data centers with high-end graphics card. It's not simply a matter of throwing a bunch of cheap hardware together and calling it a day. This increases both the cost to build the data center and the cost of electricity to run it. Graphics cards use a lot of power, especially when under full load.

Latency is another problem. When a button is pressed, a game needs to process that input fast enough so that there is no perceived delay. Even a fraction of a second delay can be a deal breaker for games like first-person shooters, where fast reflexes are key. Sending input to a server to process is inherently slower than sending it from a controller to a console, or from a mouse to a PC, and any interruption of the Internet connection would cause serious lag and frustration.

NVIDIA's GRID beta has only one data center currently, in San Jose, Calif., and the service works best in the surrounding area. As you go farther away, latency increases. So, a future commercial service would need multiple data centers spread across the country. That's an expensive proposition.

Some games today rely on the cloud for things like saving games and syncing data, and there have been some serious issues which call into question the feasibility of a cloud gaming service. Earlier this year, Electronic Arts released SimCity, a game which required a connection to EA's servers in order to be played. The launch was a complete disaster, with EA's servers unable to cope with the massive load, and it took weeks before the problem was truly fixed. Considering that all the servers were doing in this case was syncing data, not actually running the game, scaling up a cloud gaming service may be more trouble than its worth.

The bottom line
NVIDIA's GRID service has the potential to become a commercial product, but there are plenty of obstacles which will make it difficult to scale up the service. GRID could simply be a proof of concept for NVIDIA, proving to partners that cloud gaming is feasible with the hope of selling more graphics cards for that purpose. For now, the beta provides a compelling reason to try out the Shield, and it serves as a useful test of NVIDIA's graphics virtualization technology.

Timothy Green owns shares of Nvidia. The Motley Fool recommends Nvidia. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.