Sony Could Be About to Completely Revolutionize the Video Game Industry

PlayStation Now, Sony's (NYSE: SNE  ) on-demand, cloud-gaming service, will get its public debut next month. Owners of Sony's latest video game console, the PlayStation 4, will soon be able to stream games over the Internet, directly to their TVs.

In practice, this gives Sony's console a degree of backward compatibility -- even though the PlayStation 4 cannot play older PlayStation titles natively, these games will be accessible through the PlayStation Now service. Its chief competitor, the Xbox One, cannot currently play Xbox 360 titles.

But it's bigger than that. Sony's management has championed PlayStation Now as the future of the brand -- and if it succeeds, it could have immense effects on the entire industry, weighing on dedicated retailers like GameStop (NYSE: GME  ) .

Games as a service
When the open beta begins next month, investors will have a better sense of PlayStation Now's viability. Other companies, including OnLive and GameStop, have tried and mostly failed to popularize game streaming, leaving many skeptical. Sony is a massive entertainment and gaming conglomerate, with far more resources at its disposal, but there are still significant hurdles.

Specifically, lag. Video games are not like movies -- data must be sent both ways constantly, and a split-second delay can render a game unplayable. Certain kinds of games, particularly competitive fighters, are unlikely to succeed. In terms of response, some of these games are so demanding that they are difficult, if not impossible, to play on particular, high-end HDTV models (a millisecond delay in rendering the image on the screen can be the difference between winning and losing).

But most games are not so unforgiving. Those that have played with Sony's service have generally come away impressed. Polygon called the technology "striking" and described it as perfectly workable. IGN said it observed "zero lag or latency issues."

PlayStation Now's true potential
Giving PlayStation 4 owners the ability to access older titles is a welcome perk, but the true potential of PlayStation Now will likely unfold over several years. Sony has said that it plans to bring PlayStation Now to its handheld PlayStation Vita and old PlayStation 3 system, and eventually, its Bravia TVs, smartphones, and tablets.

The potential sea change in the industry is difficult to overstate. Video game consoles are expensive -- the PlayStation 4 and Microsoft's Xbox One currently retail for $399. Before a player can buy a single game they must pay an enormous upfront fee. Consequently, the market for video game consoles have largely been limited to countries with developed economies -- Japan, the United States and Western Europe. Even in the U.S., most households can only afford to purchase one console every few years.

But if Sony could remove that barrier, it would open up its games to a much wider audience. With an installed base of just over 80 million consoles, the most any particular PlayStation 3 title could sell is 80 million copies; with streaming, virtually anyone with compatible device and a reliable Internet connection is a potential customer.

Revolutionizing the distribution model
Of course, this also stands to demolish the traditional model of video game distribution built around physical plastic discs sold and resold at retailers. GameStop, a company largely dependent on the sale of new and used video games, is exposed to a shift in the industry.

Last quarter, about half of GameStop's revenue, and more than 70% of its profit, came from the sale of video game software. The growing popularity digital downloads has long been seen as a major threat to GameStop's brick-and-mortar business, but cloud-based streaming is far more dangerous.

When games are streamed, they are not physically owned -- instead of buying discs, gamers pay for bits of data. A third-party retailer like GameStop is simply unnecessary. Moreover, the resale of used games, a business that generates almost half of GameStop's earnings, would be impossible, as games would not be owned in the first place.

Bigger than the PlayStation 4
Last year's launch, and subsequent record sales, of the PlayStation 4 has been commonly seen as most significant driver of Sony's gaming business.

In reality, PlayStation Now could be several times more substantial. If it succeeds, Sony will revolutionize the video game industry by eliminating the need to have a powerful, dedicated console, and opening the hobby up to millions more potential players.

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Read/Post Comments (13) | Recommend This Article (1)

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  • Report this Comment On June 17, 2014, at 8:11 PM, 3dpenguin wrote:

    But I thought people didn't want a game system that also acts as an entertainment system. After you add all this crap on you end up with a system that costs more than the XB1.

  • Report this Comment On June 18, 2014, at 9:26 AM, Ebby720 wrote:

    A) I want to be able to trade in so this doesn't concern me since I'd like some trade in value to play something else and B) when pigs fly on the older titles and I ain't paying for what I've already bought so it better be free. I am not paying $60 bucks for something with no value once I'm done.

  • Report this Comment On June 18, 2014, at 9:54 AM, pricemaze wrote:

    I dont see the cash benefit to gamers really. $400 for a console that lasts 5 years.. thats 6.60 a month. Games you buy for 60 or buy used for 20-40 or rent from redbox for $6 for 3 days. Its nice you dont need internet for some too since the internet costs $40-80 a month. The only benefit from a cloud game service is the potential of dedicated hardcore hardware. It could be alot cheaper for Sony to run a botnet of powerful servers and computers and we are just running them at home with a controller. The cost of games I would hope would go down since the distribution needs will be gone. If it was 20 a month thats $240 a year to play but I could see them charging like $5-20 to access a given game idk.. just dont see the user benefiting.

  • Report this Comment On June 18, 2014, at 1:11 PM, CalvinballPro wrote:

    This just gives Sony a chance to sell those games twice. A small number of gamers may be dumb or desperate enough to fall for that, but not the majority. Games are already expensive enough without having to buy them a second time

  • Report this Comment On June 18, 2014, at 2:14 PM, N8sAria wrote:

    If they market it properly, it will actually be a hit. The Playstation Now would be like a Netflix or Gamefly subscription, I would imagine. Sony had also announced the Playstation TV that is coming out this year for $99. That device will be able to use the Playstation Now service, which means people would be able to play the games without necessarily having to buy a PS4 OR PS3 and still have access to the other streaming apps.

  • Report this Comment On June 19, 2014, at 8:53 AM, JJ82 wrote:

    I own a PS4 but I will never play cloud based games.

    If I don't own it, I wont pay for it, and if I pay for it, I better be able to use/play it anytime, anywhere and without an internet connection.

  • Report this Comment On June 19, 2014, at 9:48 AM, kdognumba1 wrote:

    "this gives Sony's console a degree of backward compatibility"

    No. It's gives as much BC as netflix allowing you to watch your own movies over the cloud. It screws over gamers who have been supporting them over the years who have built up a collection of physical and digital games that want to play the content they already bought.

    Don't ever try and put that horrible slap in the face in the same category as backwards compatibility. The whole "we have PC architecture" claim and lack of at least PS1 and PS2 BC yet the addition of this stupid service that most people couldn't give 2 flying flips about is one of the worst things about this new generation.

  • Report this Comment On June 19, 2014, at 10:30 AM, akp666 wrote:

    This game distribution strategy will never work. Your play experience would be limited by your bandwidth, which fluctuates throughout the day. In the evening when most users are on the internet, you more than likely wouldn't be able to use the service without the lag utterly destroying the gameplay.

  • Report this Comment On June 19, 2014, at 12:02 PM, qlb wrote:

    No matter how fast or latent free Sony's servers are it won't mean diddly squat because the ISP's will throttle bandwidth like crazy, making the games pretty much unplayable. Customers will become unhappy and cancel their service, forcing Sony to pay the ISP's more money and probably doubling their price.

    It just won't work with the current infrastructure in place because you can't bypass the ISP's.

  • Report this Comment On June 19, 2014, at 3:57 PM, MNVikingZombie wrote:

    "Revolutionize The Video Game Industry"? This happened 20 years ago on the Sega Genesis. It was a little program called The Sega Channel. It allowed you to stream games. Hardly a revolutionary idea.

  • Report this Comment On June 19, 2014, at 6:52 PM, Bunnyking77 wrote:

    I love streaming movies and if they can get games to stream like this or have purchases behave the way that they work on the PSN now, (where the account you buy a game at stays with you forever) then I think this is gonna rock.

    PS -

    BTW people didn't want an XBOXone because it cost more, had insanely annoying always on DRM where you couldn't even play a single player game offline and the Kinect 2.0.

  • Report this Comment On June 19, 2014, at 7:02 PM, Bunnyking77 wrote:

    Game streaming isn't old news, World of Warcraft does it with their free to level 20 promotions and if you look at the Gaikai has been doing it for years with partners like EA, Ubisoft and others. Especially for MMOs and high content games.

    I know that Sony has done something great, they are doing it so quietly unlike the MSFT camp which would make you believe The Cloud will save their XBOXone unit by giving it super powers.

  • Report this Comment On June 19, 2014, at 8:52 PM, hellfire45 wrote:

    Funny thing. Nobody in the industry except gamestop wants game resale. Game resale leeches money away from developers.

    You can cling to your disks but it's time for you to face reality. You won't have a choice in the matter when companies like Gamestop start to unravel in the next 5 years. You won't have a trade in option and many games won't even release with physical media.

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Sam Mattera

Sam has a love of all things finance. He writes about tech stocks and consumer goods.

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