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Cloud gaming set for further scale up in 2021

The appeal of cloud gaming is growing among developers, publishers, investors and users, so what is the big deal and what are its limitations?

Cloud gaming will undoubtedly be the big story of 2021 for the games industry, not least in terms of the technological impact it will have and the way it changes user consumption. Although contextualising cloud gaming as video streaming (but for games) is often a suitable, quick and basic explanation, the reality is that cloud gaming is far more complicated than "Netflix for gaming". Streaming games via the internet is disrupting the games market – and echoing how streaming disrupted the movie and television markets – but the sheer scale of cloud gaming technology and the interplay between its players is far more complex.

What is cloud gaming?

Cloud technology is already established and well known. It allows access to applications and content that are run remotely through a network in data centres miles away. While streaming media content is now commonplace, cloud gaming is the repurposing of this technology for games, replacing the need for physical devices (for example, consoles) to do the heavy lifting. Instead, these cloud services simply require players to access their games through a web portal or separate application which connects to a laptop, smart TV, mobile or console.

What is the appeal?

From a business perspective, cloud gaming is attractive to developers involved in high-end "AAA" projects, as it promises less technological constraints by having to ensure that a game can run on a device with minimum technical requirements. Developers and publishers will also be intrigued by this new form of distribution, which will reach a wider audience, reduce manufacturing costs, and plug revenue leaks caused by industry issues such as piracy or parallel imports (for instance, key stripping). Cloud gaming is also starting to cause significant disruption to some markets. Initially, the device-agnostic technology caused issues with some developers and publishers, as it wasn't clear if this type of delivery system would fall in pre-existing agreements or if additional licences were required. Cloud technology could potentially be used to bypass the scrutiny of "gatekeepers" in closed-distribution ecosystems by streaming content to devices instead of offering it for download. While this does appear to be an ingenious workaround for some, it is possible that where cloud gaming is more widely adopted there could be a significant decline in the mobile games market. With big-budget AAA games suddenly being playable on mobile devices, some types of games from smaller developers could be pushed to the side. For example, it is arguable that "hyper casual" games may still have their appeal but the expectations of players will have increased – which may lead to this part of the market being thinned out.

Given the tendency for cloud gaming to be associated with portable devices that allow developers to reach a much wider audience by not requiring players to invest in consoles or PCs that can play them locally, there is also the possibility that mobile devices will be one of the preferred portable means for players. If this is the case, it is possible that Asian markets, where generally more people will have mobile phones, will be leading the charge in this area.

What are the limitations?

While cloud gaming may seem like something that is no different to the technology adopted for on-demand services such as Netflix, there is a critical distinction – latency. Where on-demand platforms can pre-load or buffer content on a local device to avoid any lag for viewers, cloud gaming is much more demanding of computer systems. Not only is the cloud delivering high-quality content, but it is also receiving inputs from the player constantly. This leads to a lot of information being sent back and forth and there is very little space to buffer. However, intellectual property analytics firm Clarivate has recently published a paper that has shown that the number of patent filings worldwide between 2009-2018 was consistently higher in respect of streaming technology, latency reduction and user experience than other areas of investment. This demonstrates a strong investment in research and development in this space – and there could be a solution to this issue soon. The next big question, which will determine whether cloud gaming will be a success or not, will be infrastructure. The roll-out of 5G in various countries has been complicated. In the UK, the security concerns around Huawei, which resulted in their having to remove their technology from the 5G network, has potentially set the roll-out back years. In Germany, while the 5G coverage map already looks quite impressive overall, "white spots" remain even in major urban areas, including inner-city areas of Berlin, Munich and Cologne. Given the network demands of cloud gaming, whether this technology will be adopted may depend on higher broadband speeds becoming more accessible everywhere in the specific countries and population centres. Finally, as we move into 2021, Brexit will become less high profile and, hopefully, vaccinations will assist in significantly reducing the impact of Covid-19. However, it is likely that the issues around climate change will climb back up to the top of the industry's agenda. Video games companies will want to keep an eye on their carbon footprint if they are choosing to adapt to this cloud gaming technology. While in the short term there appears to be some benefits to cloud gaming, including reduction of manufacturing processes for consoles and physical discs and associated shipping of physical products, recent preliminary studies conducted at Lancaster University suggest that the carbon footprint of cloud gaming could eclipse these benefits due to its energy requirements. A further move from retail to subscription business models also raises contractual and regulatory challenges, especially since European legislators are remodelling the legal regime for digital content and services.

Authors

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Felix Hilgert, LL.M. Partner, Germany felix.hilgert@osborneclarke.com +49 221 5108 4434

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Tom Harding Partner, UK tom.harding@osborneclarke.com +44 117 917 3060

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Nick Kempton Associate, UK nick.kempton@osborneclarke.com +44 207 105 7333