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Apple Joins the Race to Create the "Netflix of Games"

By Leo Sun – Updated Apr 23, 2019 at 11:43PM

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But is this just another half-baked attempt to chase a hot tech trend?

Check out the latest Apple earnings call transcript.

Apple (AAPL -1.31%) could launch a subscription service for video games soon, according to a Cheddar report that cites "five people familiar with the matter." Apple reportedly started discussions with game developers in the second half of 2018, but it's unclear how the service would work, or how much it would cost.

Launching a "Netflix of video games" has been a long-term goal for many companies, but only a handful of companies have shown any real progress. Let's examine the current state of this market to see if Apple stands a chance.

A young man and woman play a video game on the couch.

Image source: Getty Images.

Understanding the game subscription market

There are two main types of game subscription platforms. The first type gives gamers unlimited downloads and local installations of games. Microsoft's (MSFT -1.46%) Xbox Game Pass, Electronic Arts' (EA -2.06%) EA Access (Xbox) and Origin Access (PC), and Humble Monthly (PC) all use this business model.

Microsoft's service costs $10 per month for access to over 200 games from nearly a dozen studios. EA's services, which both cost $5 per month or $30 per year, let users access dozens of first-party games. EA also recently launched Origin Access Premier, a premium PC tier that gives gamers access to its newer titles for $15 per month or $100 per year.

Humble, which donates some of its proceeds to charity, gives gamers random bundles of older Steam games every month (which are usually worth $100 to $200). Humble Monthly subscribers are also allowed to keep their downloads after cancelling their subscriptions -- while Microsoft and EA cut off access to previously installed games.

A young woman plays a PC game.

Image source: Getty Images.

The second type of subscription platform is the fully cloud-based model, in which gamers stream entire video games over the cloud without downloads or local installations. Sony's (SONY -2.84%) PS Now, which streams over 700 PlayStation titles to PCs and PS4s, is the market leader in this nascent market. The service costs $20 per month, $45 for three months, or $100 per year.

Other challengers in the cloud streaming market include Microsoft's Project xCloud, Alphabet's Project Stream, NVIDIA's GeForce Now, and HP's Omen Game Stream. However, all of these platforms are still being tested out for limited groups.

Why Apple wants a gaming service

Launching a game subscription service could help Apple in three ways. First, it could boost its closely watched Services revenue, which rose 24% in 2018 and accounted for 14% of its top line. The bulls hope that growth can offset its ongoing slowdown in iPhone sales, which still generated 63% of its revenue last year.

Second, it can help Apple quell the rebellion over its 30% cut of app store revenue. Many subscription-based apps, including Netflix and Spotify, already avoid that "app store tax" by directing users to subscribe on external sites instead of their iOS apps. It's only a matter of time before free-to-play games use similar methods to cut Apple out of the loop.

Therefore, Apple can launch a pre-emptive strike on those developers by tethering them to monthly subscription plans. This indicates that an Apple gaming service could more closely resemble Microsoft's Xbox Game Pass than Sony's PS Now. Apple could also use a subscription plan to remove ads from free-to-play games, and it could replace a developer's ad revenue with a steady stream of shared subscription revenue.

Lastly, Apple could offer a full cloud gaming service like Project xCloud or Project Stream, but only for macOS and iOS devices. That move could allow Apple to bring triple-A PC games -- which are often restricted to Windows PCs -- to its Macs, iPads, and Apple TVs.

Don't hold your breath

Those possibilities sound enticing, but they won't work if Apple doesn't lock in big publishers. Apple still hasn't launched its elusive video streaming service yet, so I wouldn't hold my breath for the release of a game subscription platform this year. But if Apple eventually launches a gaming service, the closed-source barriers of its operating system could help it lock in users and boost its Services revenue.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Leo Sun owns shares of Apple and HP. The Motley Fool owns shares of and recommends Alphabet (A and C shares), Apple, Netflix, and Nvidia. The Motley Fool owns shares of Microsoft and 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.

Stocks Mentioned

Apple Stock Quote
$144.71 (-1.31%) $-1.92
Microsoft Stock Quote
$246.55 (-1.46%) $-3.65
Electronic Arts Stock Quote
Electronic Arts
$127.74 (-2.06%) $-2.68
Sony Group Stock Quote
Sony Group
$79.29 (-2.84%) $-2.32

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