Many analysts believe that 5G and cloud computing could "put a gaming console into the cellphone" just as 4G put DVDs into smartphones by making video streaming possible.
Given that the gaming console market is worth tens-of-billions-of-dollars per year, there is a massive new market for companies to capture – according to IHS Market, the global cloud gaming market is expected to grow to US$2.5 billion by 2023 from US$387 million in 2018. Here are the opportunities and two Asian stocks that could benefit from this transformation.
Image Source: Getty Images
Aiming for cloud nine
Currently, cloud gaming is difficult due to the high latency and slow download speeds of 5G. With 4G, the latency, or time to elicit a response of an action, is 50 milliseconds – making smooth gameplay extremely challenging due to lags.
Given that 5G has a latency of 1-3 milliseconds, 5G cloud gaming could be almost indistinguishable from an actual console game. With 5G, the download speed is also that much faster, allowing for more graphics and video delivery. The new generation wireless technology is supposed to offer download speeds of up to 100 times faster than the current wireless technology; 4G.
Business models
5G cloud gaming could also make different business models possible. Currently most console gaming publishers make the majority of their money from selling the video game upfront. With 5G, however, gaming publishers could offer gaming subscriptions on a monthly basis, similar to how Netflix offers streaming to subscribers.
Due to the subscription model, gaming companies could potentially realize higher valuations due to better visibility in terms of their revenues as the change in subscribers generally don't change as much as the change in a video game. Advertising costs would also come down as companies no longer focused on marketing new games.
Given that the industry is still in its infancy, many companies have an opportunity to gain valuable market share in the new market. Here are two such companies that will likely benefit from the 5G cloud gaming shift.
Stock #1
NetEase Inc (NTES 4.11%) is the second-largest gaming company in China (behind Tencent), a nation that has over 620 million video players and that collectively spent around US$38 billion in 2018 on games.
Although NetEase shares didn't do well in 2018 due to the Chinese government's crackdown on new games, shares have since trended higher after the blanket ban was eased earlier this year. In terms of 5G, NetEase has partnered with 5G infrastructure specialist Huawei to produce a cloud gaming lab that will explore new types of game designs and help promote the creation of cloud games.
Given that China's government has been enthusiastic about promoting new uses for 5G, NetEase's new 5G-compatible cloud gaming titles could more easily get approval from the government.
Stock #2
Razer Inc. (1337), listed in Hong Kong, makes hardware accessories and software for the global esports and gaming markets. Razer's products range from high-performance gaming peripherals such as specialty mice to Razer's software platform which has around 60 million users.
Like other gaming producers, Razer is bullish on cloud gaming. Management believes cloud gaming could be a "fourth vertical" for the company and Razer is working with industry leader Tencent on the hardware, software, and services to contribute to growth.
The two online gaming specialists hope to bring to market gaming hardware that is compatible with Tencent Cloud gaming solutions by the end of 2018. Once 5G is more widespread, demand for 5G cloud gaming hardware could rise and Razer will be one of the first companies to benefit by potentially shifting more products.
Foolish conclusion
Clearly, 5G will change online gaming and make console-type quality games available on mobile devices – a revolution for the gaming experience. Future cloud gaming publishers like NetEase and Razer should be among the companies investors watch closely as they will likely be among the key beneficiaries.
A version of this article originally appeared on our Fool Asia site. For more coverage like this head over to Fool.hk.en.
