Microsoft (NASDAQ:MSFT) seems to fall farther behind Sony (NYSE:SNE) and Nintendo (NASDAQOTH:NTDOY) in the eighth generation console race with every passing month. The company has only sold around 5 million Xbox Ones, compared to 6.7 million Wii Us and over 10 million PS4s.
Looking ahead, Sony's cross-play features and PS Now cloud gaming network have impressed gamers, while Microsoft has barely made any progress in either field.
Yet that could change soon with Microsoft Research's DeLorean, an experimental cloud gaming system designed to predict a player's actions before they are executed. This could drastically reduce lag while streaming a game, since the system pre-loads the player's next possible moves.
For example, if a player has the choice to attack, jump, or defend, DeLorean would calculate the effect of all three moves and send them back to the console before the choice is made. In other words, the server would always stay a step ahead of the gamer.
According to Microsoft, which has tested the technology on demos of Fable 3 and Doom 3, players "overwhelmingly" preferred the DeLorean over other cloud gaming services.
The business of cloud gaming
Cloud gaming is a new technology which only recently became possible with high-bandwidth connections.
Players don't install a game locally -- they simply connect to a server where the game is hosted on high-powered hardware. The player transmits button presses to the server to control the game, and then the server broadcasts a live streaming video of the game back to the player. As a result, high-end 3D games can be played on low-end devices like smartphones, as long as the player has a fast enough connection to upload and download data simultaneously.
If cloud gaming enables games to be played across all Internet-connected devices, it could render traditional gaming consoles and physical games obsolete.
Smaller companies like Gaikai and OnLive tested out the idea several years ago, which attracted attention from Sony and Valve. In 2012, Sony acquired Gaikai, which became the foundation of PS Now. Earlier this year, Valve signed a partnership with OnLive to bring cloud gaming to Steam.
Those two deals left Xbox Live and Games for Windows Live behind in the business of cloud gaming.
What DeLorean could mean for Microsoft
Microsoft is currently pursuing the "One Windows" strategy of uniting its software and hardware ecosystems. In April, Microsoft announced "universal apps" which will be cross-compatible with Windows PCs, phones, tablets, and the Xbox One.
That was an encouraging step toward uniting Xbox Live and Games for Windows Live into a single platform. A combined Xbox One and PC gaming platform -- on which a single game can be purchased once and played on both devices -- would be a devastating strategy that could strike Sony's PlayStation Store and Valve's Steam at the same time.
Microsoft's universal apps strategy might work for lightweight games like Plants vs. Zombies, but it doesn't work for massive triple A games like Titanfall or Destiny. The Xbox One and PC ports must be developed separately because of hardware and software issues. Adding cross-platform play and saved games, while possible, requires even more work.
The DeLorean cloud gaming system could be an elegant solution that satisfies everyone. If Microsoft combines Xbox Live with Games for Windows Live, then streams games across the cloud, developers would only have to make one version of the game, which can be sold across both platforms.
That would reduce costs for developers, allow Microsoft to be less dependent on Xbox One hardware sales, and help it challenge Sony and Valve on consoles and PCs.
The potential pitfalls
While that idealized cloud-based business model might eventually become a reality, it still might be too early to bet on cloud gaming saving Microsoft's video game business, which accounted for 10% of its revenue last year.
The biggest problem is bandwidth. Netflix recently paid Time Warner, Comcast, Verizon, and AT&T to guarantee smoother connections through paid peering deals. Netflix's videos stream between 0.3GB (low quality) to 7GB (Ultra HD 4K) of data per hour. A stable connection of 5 Mbps per second, which PS Now requires, would require at least 2.3GB of data per hour.
This means after PS Now emerges from the current beta period, Sony could have to sign similar paid peering deals for stable connections. If that happens, Sony might have to pass the costs onto gamers. That would kill the entire concept of cloud gaming, since buying physical copies of some PS3 games is actually cheaper than renting the cloud-based versions on PS Now.
A Foolish final word
If pricing and bandwidth issues are resolved in the future, systems like PS Now and DeLorean could eventually replace traditional consoles altogether and make backwards compatibility a breeze.
Although a system of "predictive cloud gaming" sounds impressive, it won't mean much to Microsoft unless it can use it to unite Xbox Live and the dying Games for Windows Live ecosystems first. If it can pull that off, it would breathe fresh life into both its console and PC gaming businesses to respectively challenge Sony and Valve.