Rivalries to Partners — Sony & Microsoft

Unveiling the Cloud Gaming Competitive Dynamics

Source: Patently Apple

Sony & Xbox Intro

“When you talk about Nintendo and Sony, we have a ton of respect for them, but we see Amazon and Google as the main competitors going forward,”

Xbox Head Phil Spencer

Console Gaming Business Model

Figure 1. Game Consoling Business Model

The transformation of today’s gaming can be broadly classified into 3 stages: Physical Media (DVD, Hardisk), Digital Media (Digital Game Purchases), and Cloud (Game Streaming). Each comes with different challenges to consumers, platform developers, and gaming studios.

The first game console was introduced by Sony — Playstation. The product is sold for $299 and had received mass momentum because of the revolutionary gaming experience users are able to have. A console, a home TV, a (pair of) controller, and a few DVDs of your favorite games, then you can dwell hours and hours of time playing it. With increasing competition from the entries of Nintendo 64 and Microsoft’s Xbox, The console gaming industry had been majority occupied by these three in the early 2000s.

Sony and Microsoft had enjoyed a duopoly in the game consoling market in the 2010s, the technology boom has drastically increased consumer gaming experience from speed to a large variety of games. However, these companies profit the most from game selling, instead of console sales (See Figure 1). Console price is often seen as upfront for consumers to pay in order to access a mass library of gaming product offerings, manufacturers are not incentivized to profit much out of console sales because they realize the larger opportunities within the game sales.

In 2019, Sony and Xbox have both introduced a digital version of its product — PS5 Digital-Edition, Xbox One S. Basically it eliminates the need for consumers to purchase a CD game from (physical/online) retailers but instead purchases the games via an online marketplace at a discounted price. Although it implies that gamers can no longer resell games after they purchase it, or physically keep them as a collection, it has streamlined the customer journey where gamers can complete everything online. At the end of 2019, Microsoft’s Xbox and Sony’s Playstation have occupied 34.90% and 65.09% of the console gaming market.

Cloud Gaming Concept

(1) Users are allowed to access their games on any electronic device
(2) Users can access a library of games. Like Netflix, but games

Figure 2. Cloud Gaming Business Flywheel

From a strategic standpoint, cloud gaming is so attractive because it eliminates the need for a console, without demanding a top-tier computer/tablet to run the games. Cloud gaming removes the barrier for people to purchase a console and makes itself available for everyone anywhere at any time.

However, Cloud Gaming shares great similarity to console gaming as a variety of games, connecting speed and the size of the community remain the key success factors for companies to compete for market share. When the console is being removed, a lot of the processing is going to be sent to cloud data servers which demand substantial real-time data support. As a result, it has become super capital intensive and even harder to enter the competitions.

Competitive Analysis

Google Competitive Advantage: Google Cloud, Pixels, and Youtube
Google’s Stadia is extremely similar to Playstation Now and Project XCloud, its users can stream and play games via smartphones, web browsers, or wirelessly through a Chromecast. Google Cloud and Google Pixels allowed Stadia to run cloud gaming with full competence in imagery processing, delivering, and hardware controls. In addition to Youtube, which acts as the biggest platform for content creators, will also streamline the gaming and streaming aspects for Stadia users, by incentivizing creator compensation, providing one-click in-app streaming button, shared benefits between Youtube Premium and Stadia Pro features, etc.

Amazon Competitive Advantage: Twitch & AWS Cloud
Amazon’s cloud gaming platform, Luna, is designated to launch later in 2020, shares a similar platform to Nvidia than Sony, which is specifically targeting PC users, instead of smartphones and consoles. Like Google, Amazon has the largest gaming streaming channel, Twitch, and the largest cloud service provider, Amazon Web Services (AWS). However, Amazon’s largest competitive advantage is its prime customer base, the roll-out strategy for Amazon will primarily include bundles with its existing offerings in other fields and as Amazon develops more hardware capabilities, it will eventually compete on the same level as Sony, Microsoft, and Google.

Apple Competitive Advantage: iOS Ecosystem & Hardware
Apple Arcade is one of many of Apple’s strategic initiatives to move away from its reliance on hardware sales because of the stagnation of iPhone/iPad sales growth. Unlike other competitors, Apple Arcade does not require users to purchase individual games after they subscribed, which is like Netflix’s “one price for all” business model. However, Apple has a limited number of games and tends to not include console games. With a 46% smartphone market share in the United States and 13.5% globally, Apple’s addressable market is limited to Apple users, therefore the network effect may not be as profound as other competitors.

Potential Entry — Facebook
Facebook Gaming has launched in 2017, it serves Discord and Twitch as a streaming platform for gamers to stream their plays on PC. However, outside of streaming itself, Facebook has dedicated a lot of effort to Oculus’s Virtual Reality (VR) gaming development. Even though Facebook does not own any data centers that would support cloud gaming logistically, Facebook’s leading-edge VR development could pose threats to Microsoft if VR gaming continues to cannibalize cloud or digital gaming segments.

Challenge

The immediate need for Microsoft and Sony is to leverage their current dominant position to upsell their cloud gaming platform and make sure they have the technological edge over their competitors.

Build, Buy, or Share?

Figure 3. High-Level Decision Matrix

Partnerships have made the most sense because time has been fairly prioritized for both companies considering the growth of the market and the intensity of the competition. Acquisitions could potential be another strategy but considering the weaknesses of Sony (Cloud) and Microsoft (User Experience), there are not many acquisition targets that could be found for Sony or Microsoft. Therefore, for these reasons the companies decided to form a strategic partnership to combat new entrants.

Partnerships

Front-end
(1) Cross-Play Platform, PS5 users can interact/play with Xbox users
(2) Content Library will remain private, only games that are available on both platforms can be played cross-sectionally

Back-end
(1) Sony will distribute their leading-edge artificial intelligence imagery sensors to Microsoft for Xbox hardware development
(2) Microsoft will provide Azure cloud solutions for Sony to accelerate game processing in cloud gaming platform PlayStationNow.
(3) Both companies’ AI practices can be shared and co-develop/integrate in Sony’s consumer products.

Source: Microsoft Newsroom

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