Sony Could Be About to Completely Revolutionize the Video Game Industry

Sony's new cloud service is a challenge to retailers like GameStop, but could grow the PlayStation business significantly.

Jun 17, 2014 at 7:30PM

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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Sam Mattera is short shares of GameStop. The Motley Fool owns shares of GameStop. 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

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