NVIDIA (NVDA -1.99%) recently launched its cloud gaming platform, GeForce Now, on PCs, Macs, Android devices, and Shield devices. The service, which comes in free and paid tiers, lets gamers play their games remotely on servers powered by NVIDIA's high-end GPUs.

Unlike Alphabet's (GOOG 1.06%) (GOOGL 1.08%) Google Stadia, which requires gamers to repurchase games they may already own, GeForce Now allows them to play the games they already purchased on DRM platforms like Steam. The paid tier, which offers extended playtime sessions for $5 a month, also costs less than Stadia Pro's $10 price tag.

NVIDIA's GeForce Now.

Image source: NVIDIA.

NVIDIA's cloud gaming strategy sounds promising, but it also raises troubling questions about the future of its gaming chip business, which generated 48% of its revenue last quarter. If NVIDIA is promoting a future where high-end games can be seamlessly streamed to low-end PCs, will there still be a market for its gaming GPUs on local PCs?

The economics of local vs. cloud gaming

Maintaining a gaming PC that runs all the latest triple-A games at high settings and framerates has always been an expensive hobby.

NVIDIA's GeForce RTX 2080 Ti, which targets high-end gamers, costs a whopping $1,200. Other RTX cards generally cost between $350 to $750. A good GPU can last several years, with its longevity determined by the rising graphical demands of newer games.

But that's not all. Newer games also frequently require PC gamers to upgrade their CPU, RAM, and storage devices. Upgrading all that hardware, or buying new all-in-one gaming notebooks and desktops, can easily cost thousands of dollars.

The free tier of NVIDIA's GeForce Now allows gamers to play games that they own for an hour at a time on older GTX GPUs. When the session expires, they need to queue up again and wait for a new session. This option might satisfy most casual gamers.

The paid version eliminates wait times and offers extended sessions of up to four hours on newer RTX GPUs. Renting access to those pricey GPUs for $60 a year instead of buying them -- then needing to upgrade them later -- sounds like an economical choice for most gamers. Moreover, cloud-based games can be played across multiple devices, while local games remain tethered to single PCs.

Will cloud gaming render gaming PCs and consoles obsolete?

In short, the growth of the nascent cloud gaming market could potentially render gaming PCs and consoles obsolete. We already saw a similar disruption occur in the Blu-ray and DVD player market, which contracted over the past three years as consumers ditched optical discs and embraced streaming services.

NVIDIA's RTX 2070.

Image source: NVIDIA.

NVIDIA's gaming GPU sales won't plummet overnight, since the cloud gaming market remains tiny. But as GeForce Now, Stadia, Microsoft's (MSFT -0.18%) xCloud, and other services expand the market, the appeal of local gaming GPUs could decline.

GeForce Now's revenue can't directly offset the loss of NVIDIA's core gaming GPU revenue. However, the service could keep NVIDIA's GPUs relevant as other companies buy pricey top-tier GPUs for their own cloud gaming services.

For example, Google and Microsoft are both using AMD's (AMD 1.14%) custom GPUs in their cloud gaming platforms. That decision wasn't surprising, since AMD's chips power Microsoft and Sony's latest consoles, but it represents a big blind spot for NVIDIA.

If AMD's GPUs become the industry standard for cloud gaming, NVIDIA could be locked out of this next-gen market as its local gaming GPU sales decline. AMD could then leverage its lead in the cloud gaming market to sell more GPUs to data center customers -- which would impact NVIDIA's data center business, which generated 31% of its revenue last quarter.

The key takeaways

Investors shouldn't expect the cloud gaming market to grow fast enough to cannibalize NVIDIA's own gaming GPUs. Instead, the transition will be slow, and NVIDIA will likely shuffle toward other markets -- like data centers and professional visualization -- to offset that decline.

Meanwhile, NVIDIA isn't trying to cannibalize its GPU sales with GeForce Now. Instead, it's likely reacting to AMD's partnerships with Google and Microsoft, and proving that its GPUs can also offer robust cloud gaming experiences.