For decades, the video game industry has been about individual copies of games purchased for compatible systems. That may be changing: Companies like Alphabet (GOOG -3.29%) (GOOGL -2.75%), Apple (AAPL 2.44%), NVIDIA (NVDA -2.81%), and Electronic Arts (EA -1.78%) are increasingly focused on "cloud gaming," which could spell the end of individual game sales and -- just maybe -- video game consoles themselves.
With cloud gaming, video games don't come on discs or as digital downloads. They live on cloud servers, and devices access them over the internet. Essentially, cloud gaming allows players to stream video games. Cloud gaming could even allow for the computational heavy lifting to be done in the cloud, meaning players might be able to run big-time games on relatively stripped-down hardware.
Exactly what cloud gaming will mean for the industry is still up in the air. Google's Stadia platform comes with hardware, while NVIDIA's service is more platform-agnostic. Most companies seem to be leaning toward Netflix-style all-you-can-play monthly subscription programs, but we don't know for sure yet how payment will be structured on every service. What we do know is that Microsoft (MSFT -2.36%) and Sony (SONY -0.71%) have to be thinking about what the future of video games means for their popular video game consoles. Let's take a closer look at Sony in particular.
Sony isn't giving up on consoles
Cloud gaming theoretically allows for less powerful gaming devices, especially in terms of storage. But Sony is focused on improving hardware for its next PlayStation console, and the beefy specs we've seen so far don't look at all like a budget makeover for the PlayStation family of devices. Sony has also rejected the idea of ditching the disc drive, which is something that Microsoft has done with a new version of its current-gen machine. The PlayStation 5 will have a disc drive, impressive specs, and backward compatibility.
That's enough to make some (including some of our own here at Motley Fool) think that Sony is betting against cloud gaming. But that isn't quite true -- Sony is looking to the future even as it doubles down on old-school discs. Sony already has a cloud gaming subscription service called PlayStation Now, and that service is clearly becoming a priority.
Scaling up in cloud gaming
Sony's cloud gaming service hasn't exactly been the centerpiece of its current-gen approach, though the service does have a decent selection of more than 500 games. But Sony appears to be out to expand PlayStation Now's role, and it has turned to Microsoft, of all companies, for help.
Microsoft and Sony have cut a deal that will give Sony the cloud server muscle that it needs in order to scale up its service. (The two rivals have also agreed to cooperate to develop better cloud gaming tech in a bid to stay in front of their incoming competition.) That's a smart move, because Sony can't afford to be left behind if user preferences shift toward monthly services.
A little bit of everything
To hear Sony tell it, the next-generation PlayStation will have the best of all possible worlds: Gamers will be able to choose between a cloud gaming subscription, digital downloads of individual games, and even hard copies on Blu-ray disc. It's a smart approach, because cloud gaming has a way to go before it takes over the mainstream gaming market: The cloud gaming market is estimated to be worth $802 million, which isn't much in an industry worth north of $130 billion. When the PlayStation 5 launches, players may want a cloud gaming option, but there will almost certainly be plenty of demand for individual games, too.
And that could very well work out in Sony's favor. If the cloud gaming revolution takes hold during the next generation of consoles, it seems reasonable to expect PlayStation 5 owners to gravitate toward the service compatible with the hardware they already own: PlayStation Now. Provided Sony can scale up the service to meet demand, Sony could theoretically turn an existing PlayStation 5 user base into streaming customers. Sony has won this generation's console wars (the PlayStation 4 has far outsold the Xbox One), and could well win the next one, too. And by offering all these different ways for players to get games, including hard copies, PlayStation can lure in players not yet sold on cloud gaming and will have years to shift the balance of its new console in favor of its cloud service.