This is a weird time for the console gaming giants. While dire warnings about the last generation of consoles proved to be unfounded -- Microsoft's (MSFT 1.45%) Xbox One and Sony's (SONY 0.76%) PlayStation 4 (especially) turned out to be big successes -- this generation's threats might have more teeth. As Microsoft and Sony tease a new generation of beefy video game consoles, new competitors are going a different route: cloud gaming.

Alphabet has made it clear that it will be the gaming industry's most important new competitor. The company's cloud gaming platform, Stadia, offers a new vision of what video games ought to look like. Other companies, including Ubisoft and Bethesda, are planning cloud gaming subscription services, too (some, like Ubisoft's service, will be available on Stadia). Amazon, too, is lurking, hinting that it may soon emerge and try to become the so-called Netflix of video games.

A man plays video games

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All this loomed over Microsoft's Xbox announcements at E3, the most important video game trade show of the year. So what did we learn about Xbox's future in a cloud gaming world? Here's what the company shared about the console it has code-named Project Scarlett.

No surrender for hardware

Microsoft announced an all-digital version of the current-gen Xbox One recently, leading to some speculation that the next full generation of the system would be disc-drive-less. But that won't be the case: Microsoft is sticking with the disc drive in its new console (as is Sony). This doesn't mean that Microsoft sees a long future for hard-copy video games, but it does mean that it sees a current market for them. Perhaps today's purchasers of physical games will someday transition to cloud gaming, but Microsoft would like to have those customers be Xbox users when they make the jump -- Microsoft does, after all, have its own cloud gaming service on the Xbox.

The new Xbox will be hardware-heavy, as is traditional -- but there's nothing traditional about the cutting-edge hardware Microsoft is bragging about. Project Scarlett offers 8K graphics and 120 fps (frames per second); the latter is well beyond what a typical TV can handle in 2019. The biggest contrast to Stadia is no doubt the solid-state hard drive that Project Scarlett will use for onboard storage. There is no hard drive in Stadia, since it is designed around cloud storage.

What about streaming?

The most surprising thing about the Xbox announcement was how typical it was. Like Sony, Microsoft seems to be betting that video game streaming is more the way of the future than the way of the present -- for now, the assumption at Microsoft seems to be that flagship consoles still need hard drives and disc drives.

With that said, Microsoft is not ignoring the streaming revolution. For evidence that the company takes the threat seriously, look no further than the recently announced deal with Sony -- Microsoft is partnering with its longtime rival to build cloud gaming solutions. At the same time, Microsoft is working on its xCloud gaming platform and maintaining its Xbox Game Pass video streaming subscription service. The latter will reportedly be folded into Xbox Live (the subscription service that allows users to play Xbox online), making it all but mandatory for the eventual owners of Project Scarlett consoles. Streaming is clearly a part of Microsoft's long-term plans, but Microsoft is not mourning the death of its traditional console business just yet.

Xbox's future

It is possible that this will be the last true "console" generation -- though Microsoft execs say otherwise, claiming Project Scarlett will be followed by yet another device someday. Perhaps the future involves putting more and more games -- and the hardware it takes to store and run them -- in the cloud, leaving end users with glorified streaming devices in place of big-time consoles. But Microsoft and Sony clearly feel that such a future is still several years away at the earliest, and they're betting that keeping their customers happy with traditionally powerful consoles is the best way to turn today's console buyers into tomorrow's loyal streaming subscribers.