Sony (SONY -0.54%) recently revealed that PlayStation Now, the cloud gaming platform it launched five years ago, had 700,000 subscribers at the end of 2018 -- more than triple the size of its largest rival. That figure seems tiny compared to Sony's installed base of 96.8 million PS4s, but it's risen over 40% every year since its launch in early 2014.
PS Now subscriptions cost $19.99 per month, $44.99 per three months, and $99.99 per year. This means that the service is generating between $70 million and $168 million in revenue annually, which would represent less than 1% of Sony's GN&S (game and networking services) revenues for 2018.
Nonetheless, Sony remains firmly committed to PS Now's expansion. It expanded the service to nine more countries in 2018 to reach 19 total countries. The service now streams over 750 PS3 and PS4 games to PS4 consoles and Windows PCs.
Sony also added a download service that lets gamers with spottier internet connections download games instead of streaming them last September. The company notes that gamers are now spending twice as much time playing downloaded games than streamed ones. Those rising membership levels and engagement rates indicate that PS Now's weight on the GN&S unit's top line could rise significantly over the next few years.
A key part of Sony's ecosystem strategy
Sony's PS4 and Microsoft's (MSFT -0.31%) Xbox One were both launched more than five years ago. Both companies subsequently refreshed their consoles with smaller form factors and upgraded hardware, but the market is becoming saturated. As a result, both Sony and Microsoft are focusing on expanding their software ecosystems to squeeze out more revenue per gamer.
Sony's total GN&S revenue rose 19% annually in 2018 as higher software sales and a growing number of PlayStation Plus subscribers offset its declining hardware sales. Microsoft also reported similar results last quarter, with its 31% sales growth in software and services offsetting its lower hardware sales.
That's why cloud gaming, which is often referred to as "Netflix for video games," is a lucrative long-term goal. If Sony and Microsoft can lock gamers into recurring subscriptions for on-demand access for video games, they could significantly reduce their long-term dependence on console sales.
Preparing for a console-free future
If gaming consoles eventually become obsolete, the PlayStation and Xbox could live on as cloud-based apps for set-top boxes, smart TVs, and other devices. Sony foresaw that future when it acquired Gaikai, the cloud platform that would eventually become PS Now, in 2012. That's why Sony initially launched PS Now on a myriad of devices before narrowing its focus to the PS4 and Windows PC in early 2017.
Microsoft is also developing its own cloud gaming platform, Project xCloud, to compete with PS Now. Alphabet's Google plans to launch its own multi-platform cloud gaming service, Stadia, later this year. These platforms could all make game streaming a viable alternative to purchases -- just as TV shows, movies, and music made the transition in recent years.
If that happens, the global cloud gaming market could grow from $1.06 billion in 2018 to $4.9 billion by 2025 according to Analytical Research Cognizance. This indicates that PS Now, which already has a first-mover's advantage in the market, could see its growth accelerate significantly over the next few years.
The future of PS Now
SuperData named PS Now the largest game subscription platform in the world last year, followed by Microsoft's Xbox Game Pass and Electronic Arts' EA Access, Origin Access Premier, and Origin Access, in that order. However, those platforms offer unlimited downloads instead of cloud-based streaming. Sony didn't name its largest direct rival in the cloud gaming market, but it's probably a smaller player like NVIDIA's GeForce Now, LiquidSky, Shadow, or Vortex.
Sony's comments about PS Now indicate that it remains an integral part of the GN&S unit's future. However, Sony doesn't plan to fully transition over to cloud gaming anytime soon -- the known specifications of the upcoming PlayStation 5 indicate that it will still sport beefy hardware to play locally installed games.
But looking further ahead, higher-bandwidth connections and lower prices for PS Now could convince more gamers to pivot from a la carte purchases toward streaming subscriptions, which would alter the entire video game market -- and potentially spell doom for traditional video game retailers.