When NVIDIA (NVDA -0.66%) launched its cloud gaming platform GeForce Now in February, it seemed poised to disrupt the nascent market.
Unlike Alphabet's (GOOG -1.98%) (GOOGL -1.82%) Google Stadia, which required gamers to repurchase games they already owned, GeForce Now allowed gamers to stream those owned games without an additional purchase.
GeForce Now also launched with a free tier, while Stadia only launched its free tier in early April. GeForce Now also offered a wider selection of games, thanks to its partnerships with major game publishers. But over the past two months, many of those partners removed their games from GeForce Now.
Activision Blizzard (ATVI -0.71%), Take-Two's 2K Games, Bethesda, Microsoft (MSFT -1.94%), AT&T's Warner Bros. Interactive, Codemasters, and Klei Entertainment all pulled their games from the platform, and others could follow suit in the near future. Does this exodus indicate that GeForce Now will fizzle out before the cloud gaming market gains momentum?
Why are publishers pulling their games?
These publishers are likely pulling their games from GeForce Now for four reasons. First, NVIDIA previously told Bloomberg that Activision Blizzard wanted to strike a new revenue-sharing deal after GeForce Now's formal launch. NVIDIA refused, and Activision pulled its games. Other publishers likely wanted similar deals.
Second, some of these companies might be developing their own cloud gaming platforms. Microsoft is preparing to launch its own service, xCloud, so it wouldn't make sense to offer its first-party games on NVIDIA's competing platform.
Developers also complained that NVIDIA listed their games without their consent and that the "buy once and stream anywhere" model rendered cross-platform games obsolete. For example, mobile ports of popular PC and console games could vanish if gamers could simply stream the full versions from any Android device.
Lastly, publishers likely felt more comfortable with Stadia's digital locker model, in which gamers bought the full version of a game again for streaming access. That model crushes the dream of developing a "Netflix for games," but it allows publishers to maintain tighter control over their properties.
What's next for NVIDIA?
NVIDIA still holds partnerships with other big publishers and DRM platforms, including Valve's Steam, the Epic Games Store, and Ubisoft, and noted that 30 of the top 40 games on Steam were still available.
It also recently added Ubisoft's complete Assassin's Creed and Far Cry franchises to the platform. Therefore, GeForce Now isn't dead yet, but it will likely lose any publisher with conflicting interests in the cloud gaming market.
On its own, GeForce Now won't move the needle for NVIDIA. But GeForce Now teases a future in which gamers no longer need to upgrade their gaming chips -- which generated 48% of its revenue last quarter -- since they'll be able to stream high-end games on low-end devices.
That cannibalization won't happen overnight, but we could see a gradual disruption of the gaming GPU market as cloud gaming services gain mainstream users. However, cloud-based games still need to be streamed from powerful GPUs -- and Google and Microsoft both installed AMD's (AMD -1.22%) GPUs in their cloud gaming platforms.
Therefore, GeForce Now might be a reaction to AMD's advance across those data center markets, which generated 31% of its revenue last quarter, instead of a full-fledged attempt to challenge Stadia or xCloud. In other words, it's a showcase platform that demonstrates the capabilities of its GeForce GPUs in cloud gaming.
If gamers gradually shift to cloud gaming services over the next few years, as movie watchers abandoned optical discs for streaming, NVIDIA might offset the loss of its discrete gaming GPU revenue with sales of higher-end GPUs to cloud gaming data centers.
The key takeaways
NVIDIA's "buy once and stream anywhere" strategy with GeForce Now sounded promising for gamers, but it was always destined to lose publishers -- just as Netflix lost content providers that wanted to develop their own streaming platforms. Looking ahead, we should see if Microsoft, which also plans to let gamers stream games they already own on xCloud without a second purchase, can succeed with the same model.
GeForce Now isn't a failure yet, since NVIDIA probably never intended for the platform's subscription revenue to become a major growth engine alongside its GPU and Tegra CPU businesses. Instead, it showcases the power of its GeForce GPUs in cloud streaming -- which could convince other cloud gaming platforms to buy more of NVIDIA's chips for their data centers.