NVIDIA (NASDAQ:NVDA) on Nov. 18 launched its PC cloud gaming service GRID for SHIELD devices as a free preview that will last through June 30, 2015, in the U.S. The service will launch in Europe next month. GRID will launch with 20 streaming PC games, including Borderlands 2 and Batman: Arkham City. It is unclear if GRID will become a paid service after the free preview period ends.
GRID is a rival to Sony's (NYSE:SNE) PlayStation Now, a streaming service that delivers select PS3 games to PS4, PS3, PS Vita, PlayStation TV, and Sony TVs over the cloud. Sony plans to add PS1, PS2, and possibly PS4 games to the service in the future. PS Now started its open beta in September, and offers over 150 games that are rented out for periods between four hours to 90 days. Sony is reportedly considering a flat monthly fee once the beta concludes.
What GRID means for NVIDIA
NVIDIA last year launched its handheld SHIELD Android gaming console for $299, which was discounted to $199 in March. In July, the company expanded the SHIELD line with a gaming tablet ($299 to $399) and a wireless controller ($60).
Investors puzzled over NVIDIA's entry into the crowded tablet market, since its revenue mainly came from sales of GPUs for graphic cards and Tegra processors for mobile devices, Chromebooks, and 2-in-1 devices. It also seemed like an unnecessary boost to operating expenses, which had already risen 13% year over year in fiscal 2014.
But with the SHIELD, NVIDIA can demonstrate Tegra's gaming abilities while slowly declaring independence from its hardware partners. Tegra processors, which accounted for 14% of NVIDIA's top line last quarter, use designs licensed from ARM Holdings (NASDAQ:ARMH). However, the ARM market is now dominated by integrated device makers such as Apple, Samsung, and Qualcomm, which marginalized NVIDIA and restricted it to making chips for underdog competitors like Hewlett-Packard, Acer, and Asus. Despite that competitive pressure, Tegra sales rose 91% year over year in the first half of fiscal 2015, compared to 8% growth at its GPU business.
We should think of the SHIELD tablet as a "Swiss army knife" of gaming -- it can play touchscreen tablet games, controller-based games, connect to the TV, and stream local PC games. Adding GRID cloud games, which can be played anywhere with a Wi-Fi or 4G LTE connection, completes the circle by letting gamers play triple-A games on the go.
What PS Now means for Sony
For Sony, PS Now is a way to prepare for a future without consoles. As digital downloads rise and Internet speeds improve, Sony believes that all games will eventually be delivered as streaming content, like an interactive Netflix video. When that happens, high-powered consoles such as the PS4 and Microsoft Xbox One will no longer be necessary, since cloud gaming relies on Internet bandwidth rather than raw horsepower.
This isn't Sony's first attempt to let gamers play a single game across multiple platforms. With PS Mobile, its soon to be discontinued Android gaming platform, Sony introduced cross-platform indie "PlayStation" games for the PS Vita and select Android devices. But that effort failed because games had to be designed for the weakest Android device, instead of taking full advantage of the PS Vita's graphical capabilities.
That's why Sony acquired cloud gaming service Gaikai, now the backbone of PS Now, for $380 million in 2012. Sony knew that if traditional consoles faded away, it would preserve the PlayStation brand as the "Netflix of video games," which could seamlessly access Sony's entire library of games across the cloud.
PS Now probably won't in the near future become a major source of revenue for Sony's game and network services business, which accounted for 16% of its top line last quarter. However, PS Now can be considered Sony's long-term investment on the future, which could put it far ahead of rivals Microsoft and Nintendo when customers finally abandon traditional consoles.
Cloudy days ahead
Despite commitment to cloud gaming from Sony and NVIDIA, the overall outlook for the market is unclear.
It often costs more to rent the game through PS Now than to buy a used physical copy, which defeats the whole purpose of a cloud rental platform. When NVIDIA's free preview period expires, it will have to make a similar decision as Sony -- will it stick with an a la carte model, or will it decide on a flat rate? Meanwhile, the threat of ISPs throttling download speeds -- as illustrated by Netflix's paid peering deals with AT&T, Comcast, Verizon, and Time Warner Cable -- could cause cloud gaming rental costs to soar.
For now, neither NVIDIA nor Sony need cloud gaming to survive. In the long term, however, this shift should help Sony more than NVIDIA, since the cloud will provide backward compatibility for PS games across multiple devices. NVIDIA's efforts might slightly boost SHIELD sales and encourage hardware makers to use Tegra processors, but it might not be enough to reclaim market share from Qualcomm, Apple, and Samsung.
Leo Sun has no position in any stocks mentioned. The Motley Fool recommends Nvidia. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.