At CES this year, Sony (NYSE:SONY) announced PlayStation Now, a cloud-based game streaming service set to launch this summer. Game streaming services are not new, but none so far have gone mainstream. At first, PlayStation Now will allow the streaming of PS3 games to PS3 consoles, PS4 consoles, and most 2014 models of the Sony BRAVIA TV. Over time, the service will expand to include other Sony devices and non-Sony devices, and eventually games from previous PlayStation consoles will be included as well.
This service has the potential to give Sony a big advantage over Microsoft's (NASDAQ:MSFT) Xbox One. It will likely have a negative effect on GameStop (NYSE:GME), a company that heavily relies on used game sales.
A solution to backward compatibility
Neither the PS4 or the Xbox One are backward compatible with games from previous generations, a fact that may prevent some from buying the new consoles until there are more games available. PlayStation Now solves this problem, allowing PS3 games to be streamed either by renting them or via a subscription plan. The full list of games that will be available at launch hasn't been announced, but it likely won't be the entire PS3 library; instead, it will likely only include games that were popular enough to justify their inclusion.
The fact that PlayStation Now will eventually be available on tablets, smart phones, and TVs gives gamers a very good reason to choose PlayStation over the competition. While the service may seem to threaten sales of the actual PlayStation consoles, cloud gaming doesn't completely replace dedicated hardware. Because the games on the PlayStation Now service will be running on servers in the cloud, communication between the device and the cloud adds a small but noticeable amount of lag. In some cases this may be irrelevant, but any game that relies on quick reflexes is probably not ideal for cloud gaming.
PlayStation Now doesn't fully replace the need for consoles, especially since it won't be streaming PS4 games. Instead it provides a complimentary service which makes the PlayStation ecosystem a lot more attractive.
Microsoft may have something up its sleeve
It's very possible that Microsoft has similar ideas for the Xbox One, although nothing has been announced to that effect. Microsoft operates the Azure cloud service, so it certainly has the infrastructure to support a cloud gaming service. Azure is already being used in some Xbox One games such as EA's upcoming Titanfall to run certain parts of the game, so it's not a stretch to imagine that Microsoft has bigger plans.
This is just speculation, however. It's also possible that Microsoft was caught completely off guard by the announcement and is now scrambling to consider a service of its own. If Microsoft isn't planning something, then PlayStation Now will give Sony a serious advantage when it launches this summer. It may help to widen the PlayStation 4's lead over the Xbox One in terms of sales as well, a lead which I predicted before the consoles launched.
Not good news for GameStop
GameStop has built a significant used game business, where pre-owned copies of old games are sold with a gross margin of over 40%. The gross margin for used games was more than twice that of new games in the third quarter, and any threat to used game sales will have a serious impact on GameStop's bottom line.
PlayStation Now has the potential to seriously disrupt the used game market, especially if the service is priced low enough. There's little reason to buy and sell used games when access to old games is available for a small monthly fee, and if PlayStation Now becomes popular then I suspect that GameStop will see its used game sales contract.
It's not the end of the world for GameStop, but profits will likely be pressured once PlayStation Now launches this summer.
The bottom line
PlayStation Now represents a bold step by Sony to bring the PlayStation catalog of games to all devices. It also adds a very good reason to choose the PlayStation 4 over the Xbox One. Microsoft may end up launching a similar service eventually as it has plenty of cloud infrastructure available, but for now it seems that PlayStation has a big advantage over Xbox.