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What Happens When Streaming Takes Over Video Games?

By Stephen Lovely – Updated Apr 11, 2019 at 12:39PM

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What happened to Hollywood and the recording industry seems destined to happen to video games next. What will change about the video game business, and who might benefit?

Subscription streaming services are starting to look like the future of video games. Microsoft (NASDAQ: MSFT) and Sony (SONY 2.86%) have subscription video game streaming services that work on their consoles. Nvidia (NASDAQ: NVDA) has a streaming service that works on PCs and on its Nvidia Shield TV streaming service. Tech giants Amazon (NASDAQ: AMZN), Apple (NASDAQ: AAPL), and Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) are all reportedly considering or developing subscription video game streaming services.

Whichever companies end up on top of the subscription video game streaming pile seem sure to be rewarded. But what happens to other stakeholders? Hollywood and record companies have not exactly welcomed the streaming era with open arms. What will streaming do to game developers and publishers like EA (EA 1.81%) and Activision (NASDAQ: ATVI)? What will video game subscription rights deals look like? And how will video gaming change for users?

Check out the latest earnings call transcript for EA.

A man plays a video game, holding a controller in his hands and looking at the scene on a television.

Image source: Getty Images.

Signing the deal

One of the most important things to consider about video game streaming services is how the licensing deals will work.

Not all streaming services rely on the same sorts of licensing deals. Netflix and its premium video subscription peers, for instance, have largely relied on exclusive deals and predictable payments. On the music side of things, deals have rarely been exclusive, and royalties are generally tied to usage.

So far, the early arrival of the console giants (Sony and Microsoft) on the video game streaming scene has meant that streaming deals have included exclusives. Generally, the exclusives are the products of the companies' own studios and/or publishers, making them a bit like Netflix-style original content. For instance, Sony's PlayStation Now includes access to The Last of Us, which was developed by Sony's Naughty Dog and published by Sony's Sony Computer Entertainment.

Original content is a vital differentiator for streaming services that also makes them more cost-efficient. And if a company can lock down some of the best content for itself because it is the creator, that's a win. Sony, for instance, published two of the 10 top-selling games of 2018 -- Marvel's Spider-Man and God of War -- and made both PlayStation 4 exclusives.

PlayStation 4 is the clear winner of this current generations of consoles, with more than 91 million units sold, and it has achieved that status in part because of its acclaimed exclusives. Quality exclusives and originals bode well for Sony's PlayStation Now subscription service, and suggest that the streaming future of video games will look at least a little bit like the streaming present of video games and TV, in which exclusive deals and originals loom large.

Video game developers and publishers

The streaming future of video games may be very appealing to Microsoft, Sony, and the other companies that are gearing up to act as middlemen between gamers and developers. But it can't look as good to companies like EA and Activision.

On the bright side, steady long-term revenue from streaming rights deals might allow EA and Activision to rely less on loot boxes and microtransactions, controversial income sources that have allowed them to keep games profitable long after release.

Game developers could also consider a move like the one Disney (NYSE: DIS) is making: Left with lots of movies and TV shows in a space increasingly dominated by streaming services full of original content made in-house, Disney decided to create its own streaming service. In fact, EA is already doing just that: It has a "cloud gaming" service already in the works.

Of course, the console giants may or may not be open to allowing every video game publisher to release streaming apps for their platforms. But ultimately they don't have complete control over video game streaming. Since video game streaming can rely on cloud computing, a user's home hardware does not necessarily have to be as impressive as you might think.

Consoles, streaming devices, and a complicated future

EA has demonstrated its streaming platform (still in development) on smart TVs with cheap wireless controllers. An Amazon streaming service will also use cloud computing to put modern games on less powerful devices, and Google's service, called Project Stream, will reportedly get top-tier games to run in the Chrome web browser. With subscription gaming, the idea of needing big, beefy consoles in the home may become antiquated.

To be sure, there are still advantages to consoles. Netflix users can download movies to their devices for offline viewing, but to do the same with a video game would require console-like hardware. But if internet-connected users can stream desired games in 4K on a cheap Fire TV device, that will change the nature of the video game business.

It is easy to imagine a future in which Microsoft, Sony, and their new competitors sell hardware at cost and become increasingly reliant on cloud solutions.

The cloud's the limit

Microsoft and Sony have captive audiences for their early streaming efforts, but the biggest changes that streaming video games will trigger have yet to come. When cloud computing solutions make leaner hardware gaming-ready, there will be a lot of competition in the video game streaming market and, most likely, consumers will be spending a lot more on monthly subscriptions and a lot less on video game and hardware purchases.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. 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. Stephen Lovely owns shares of Amazon, Apple, and Netflix. The Motley Fool owns shares of and recommends Activision Blizzard, Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Netflix, Nvidia, and Walt Disney. 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.

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