Nvidia's (NVDA 0.20%) GeForce Now cloud gaming service officially launched last year after spending a few years in beta testing. Membership has more than doubled to more than 12 million gamers. The chipmaker's gaming segment has exploded over the last few years and grew 85% year-over-year to slightly over $3 billion in revenue last quarter. Selling high-end graphics cards to PC gamers is Nvidia's specialty, which makes its recent gains with GeForce Now more impressive.
Cloud gaming is largely seen as the future of the $175 billion video game industry. Here's why Nvidia is well positioned to lead this rapidly growing market and significantly expand the long-term growth runway for its gaming business.
Why GeForce Now is growing
Microsoft's (MSFT -0.32%) Xbox Game Pass and Electronic Arts' (EA -1.61%) EA Play have been two of the most successful services so far. With these services, players can play a catalog of titles for a nominal fee, like a typical streaming service. But Nvidia's GeForce Now is tackling the opportunity a little differently.
Instead of allowing players to access unlimited titles, GeForce Now only allows gamers to play games they already own. The catch is that games streamed on GeForce Now are played over cloud servers equipped with Nvidia's high-end gaming GPUs. The value proposition for subscribers is the service allows players with underpowered hardware to play the latest games at the highest graphics settings. Nearly 80% of the devices accessing the service right now would not be able to play the latest games from top game publishers, according to Nvidia's numbers.
GeForce Now's subscriber base is right on the heels of other popular services. Microsoft's last official subscriber count for Game Pass was 18 million, although reports have that figure up to 30 million now. EA Play reported having 13 million subscribers at the start of 2021. GeForce Now's 12 million subscribers looks solid in that context.
Nvidia's advantage is that it already has a built-in player base of 140 million gamers who have a PC equipped with an Nvidia graphics card. Beyond that, there are an estimated 2.8 billion worldwide that play games across all devices, according to market researcher Newzoo. However, Nvidia says there are over 1 billion PCs and devices, including phones and tablets, that are not powerful enough to play the latest games at the highest graphics settings. This creates the potential for GeForce Now to add new subscribers for years.
GeForce Now boasts a growing game selection of more than 1,000 titles -- larger than Xbox Game Pass -- and Nvidia just reached a partnership with Electronic Arts to bring top titles like Battlefield 1, Dragon Age: Inquisition, and the popular esports shooter Apex Legends to the platform. EA could have held these games exclusively for EA Play, but the game maker clearly sees the growth at GeForce Now as an attractive means to expand the audience for its titles. This could lead to other deals with other top game producers and further fuel Nvidia's momentum in this space.
Nvidia's long-term growth strategy is to team up with internet service providers and other telecommunications companies to offer GeForce Now to their subscribers. Management calls cloud gaming "the killer app for 5G." As 5G wireless speeds become more widely available, the entire cloud gaming market could take off. Because Nvidia is already a very recognizable brand in the gaming industry, GeForce Now is well positioned to be one of the few services that rise to the top of this market that is waiting to explode.
Nvidia is solidifying its lead in gaming
GeForce Now is rapidly expanding the addressable market for Nvidia's gaming business and helping strengthen its already strong brand in gaming. Despite the efforts of Advanced Micro Devices' (AMD -0.33%) to win back share, Nvidia managed to improve its market share in the second quarter to 83% of the PC discrete GPU market, up from 80% a year ago.
Ultimately, GeForce Now helps Nvidia shore up its only weakness, which is the price of a GeForce GPU. This is crucial in the current environment, where the semiconductor shortage is causing rapid sell-outs of graphics cards, pushing aftermarket prices to astronomical levels.
AMD has historically competed well at the low end of the market, but with GeForce Now, Nvidia stands to win over more gamers on a tight budget that might otherwise go with a competitors' offering or never play PC games at all.