Amazon makes play to take video gaming into the cloud

Video game publishing moved to the cloud long ago. Now the world’s dominant cloud infrastructure firm wants to take the rest of the industry there, too.

Amazon.com (AMZN) is set to do to the video game industry what it did to retailing. That’s according to a report from The Information, an online investigative journalism company.

Investors should pay attention to that prediction. This is important.

When Jeff Bezos left a lucrative Wall Street job two decades ago to found Amazon.com, most of his peers thought he was crazy. Selling books online didn’t seem like a lateral move. It was fraught with risks. Margins were low. Providing fulfillment meant solving new problems.

However, Bezos was thinking larger. He was building a new, scalable commerce model — one that didn’t involve inventory or pricey physical storefronts.

From the beginning, the success of Amazon rested on proprietary algorithms and numerous stacks of networked computer servers. It was a business built in the cloud. If the concept worked, it could be applied to multiple categories. It had the potential to disrupt the status quo in unimaginable ways.

The video game industry is a perfect cloud infrastructure candidate. Publishers embraced digital early. Game titles are now distributed online, and many companies have found a lucrative business model monetizing players’ time with in-game advertising, and the sale of virtual items like extra lives and gameplay hints.

Related post: 4 ways to profit from the burgeoning video game business

Newzoo, the leading provider of market intelligence for the global video game industry, forecasts that 2.3 billion gamers spent $137.9 billion during 2018, an increase of 13% over 2017. Analysts at the Amsterdam research outfit believe global revenues will surge to $180 billion by 2021, a 10.3% compound annual growth rate.

Amazon is targeting hardware makers. Sony PlayStation, Microsoft Xbox and Nintendo have built massive franchises by selling game consoles. Sony announced in August 2018 that total sales of PlayStation systems reached 500 million units to date.

Traditional computer and peripheral firms like Dell Technologies (DELL), Asus, Hewlett-Packard (HPQ), Advanced Micro Devices (AMD) and Nvidia (NVDA) have entire divisions devoted to producing costly, high-powered systems for gamers.

Nvidia, the maker of best-in-class graphic processing units for gaming computers, had sales of $7 billion through the first three quarters of fiscal 2019, an increase of 13% year-over-year. And in an era of declining profit margins, its RTX 2080 and Ti Founders Edition GPUs still sell for $800 and $1,200, respectively.

Amazon’s gaming service would bypass the need for costly hardware. The intense computation would happen at Amazon Web Services, its cloud computing division. Gamers would only need a set-top box, which could double as a hub for curating TV shows and movies, and some inexpensive game controllers.

It is a terrific idea. And Amazon, with its Fire TV set-top boxes, data centers and gigantic distribution network, certainly has all of the pieces to build scale quickly.

Nvidia managers began thinking about this evolution long ago. Its GeForce Now streaming service brings the most demanding video games to any computer at 60 frames per second and up to 4K resolution. All the heavy lifting happens in the cloud on its cutting-edge hardware.

There is nothing to install or maintain. AI software sets all of the parameters based on its continuous reading of the hardware and network connection. And it works well.

Beyond proof of concept, GeForce Now is a powerful showcase for Nvidia software and data center hardware.

Microsoft (MSFT), a Nvidia customer, announced a service that would stream game titles to existing Xboxes last year. And a tech writer at Fortune got to play with Project Stream last October. The Alphabet (GOOGL) product exhibited excellent gameplay on a laptop that struggled to stream Netflix (NFLX) consistenly, according to the writer.

Traditional business models have been flipped on their head. Companies with lots of engineering talent and powerful networks, understand there is plenty of money to be made monetizing time through some combination of advertising, in-app sales and subscriptions.

None of this disruption is going to happen overnight. However, investors should be aware the foundation is being laid. Companies that fail to prepare are going to see large portions of their current business vanish.

Best,
Jon D. Markman

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