Alphabet's (NASDAQ:GOOG) (NASDAQ:GOOGL) Google launched its cloud gaming platform Stadia last month, but it received a chilly reception from gamers. Earlier reviewers criticized its unstable gameplay and confusing business model, which required gamers to buy the individual games they wanted to play on Stadia.
That was a far cry from the "Netflix of games" many industry watchers had expected. Instead, it was basically a cloud-based locker for purchased games that ran on Google's servers. This approach seemed clumsy compared to Microsoft's Xbox Game Pass and Apple Arcade, which both granted gamers unlimited downloads from a large library of games for a flat monthly fee.
In short, Stadia won't move the needle for Google or the nascent cloud gaming market anytime soon. However, investors should turn their gaze overseas to the brewing cloud gaming battle in China between Tencent (OTC:TCEHY) and NetEase (NASDAQ:NTES), the country's two largest video game publishers.
Tencent's Instant Play and Start
Back in February, Tencent and Intel (NASDAQ:INTC) revealed Instant Play, a new cloud gaming platform for PCs and mobile devices. The companies showcased the service in a few demos atMobile World Congress in Barcelona and the Game Developers Conference in San Francisco. Tencent subsequently launched another cloud gaming service, Start, in a beta test across southern China in March.
It's unclear if Instant Play and Start are separate projects, but they indicate that Tencent wants to migrate its massive portfolio of games -- which include Honor of Kings, League of Legends, and PUBG Mobile -- to the cloud. Tencent could also leverage its stakes in a growing list of publishers -- including Fortnite maker Epic Games, Activision Blizzard, and Ubisoft -- to bring their top games to its cloud gaming service.
Tencent's WeGame digital store on PCs also gives it a natural platform for launching cloud-based games. Tencent recently introduced a cloud service that lets developers host their games on Tencent Cloud and stream purchased titles on WeGame, which could serve as a stepping stone toward a full-blown subscription service.
In addition, Tencent owns Tencent Video, one of the top video streaming platforms in China, and the messaging platforms QQ and WeChat, which reach 731 million and 1.15 billion monthly active users (MAUs), respectively. Integrating its cloud gaming services into those massive ecosystems could create the seamless streaming, messaging, and gaming platform that Stadia aspires to be.
NetEase launches a cloud platform for mobile games
NetEase started testing its own cloud gaming service in late November. Unlike Tencent's services, which stream both PC and mobile games, NetEase only streams lightweight mobile games to Windows, iOS, and Android devices.
NetEase's platform currently supports 38 mobile games, including 20 of its own titles and other hit games like Tencent's Honor of Kings and Bilibili's Fate/Grand Order. These games are launched in a mobile browser instead of a dedicated app, and gamers can set the quality of the graphics to suit their internet connections.
NetEase claims that the streamed games require less storage space and battery power. However, NetEase's service only offers a limited number of gameplay slots per game, and gamers need to queue up to play the game. That's likely because NetEase's cloud platform -- which is much smaller than Tencent's -- can't handle that many simultaneous connections.
Therefore, NetEase might need to host its cloud gaming service on a larger platform, like Alibaba (NYSE:BABA) Cloud, to reach a larger audience and compete effectively against Tencent.
Which tech giant has the upper hand?
Tencent clearly enjoys the first mover's advantage against NetEase in this market. Its cloud gaming services won't boost its gaming or cloud revenue anytime soon, but they could eventually merge with its other social and video streaming services to deliver a seamless on-demand gaming experience across multiple apps and devices.
That expanding ecosystem could widen Tencent's moat against NetEase in the gaming market, Alibaba in the cloud market, and ByteDance in the social media market. A cloud gaming service could also stabilize its video game unit, which generated 29% of its revenue last quarter but remains heavily dependent on hit mobile games like Honor of Kings.
Yet investors shouldn't dismiss NetEase's cloud gaming efforts. Its core gaming business, which generated 79% of its revenue last quarter, remains strong, with hit games like Fantasy Westward Journey and Knives Out leading the charge. Its close relationship with Alibaba (which acquired its e-commerce platform Kaola and a stake in NetEase Cloud Music) could also lead to a cloud gaming partnership as the market matures.
Tencent and NetEase could both become major players in China's cloud gaming market, and the upcoming battle should be more interesting to watch than Stadia's clumsy stab at the cloud gaming market.