Nearly 15 years ago, most video games were sold in brick-and-mortar stores. Valve was about to launch Steam, and people could anticipate that digital sales were the future of the gaming industry. “But it will take time,” most industry professionals said. No one could predict exactly how quickly the transformation from physical to digital gaming would happen.
A few years later, many in the PC physical gaming market were out of business.
Several industry players reacted quickly to this transition by moving to digital, but the true victors have been the distributors. Electronic Arts was one of the first to react to this new reality by creating its own digital store: Origin. One of the first, yes, but still too late. Origin was launched eight years after Steam, but has struggled to make an impact outside EA’s own games. However, today we are witnessing how publishers are fleeing from Steam and creating their own solutions: Blizzard has had the Battle.net launcher, which recently has added more Activision games in an attempt to join Destiny 2 and Call of Duty to an existing, successful platform; Epic has just launched the Epic Games Store.
None of these moves have prevented Steam from controlling PC gaming distribution — yet. In 2019, Steam still dominates digital sales in the West. Steam distributes millions of video games a year. Revenue generated by game sales on Steam in 2017 totaled $4.3 billion, taking a substantial piece of the video game retail margin from publishers.
Steam offers a 70/30 revenue split for the first $10 million in sales. Once revenue exceeds $10 million, the revenue split becomes 75/25 and, over $50 million, 80/20. This revenue share problem has resulted in Steam competitors offering better terms to publishers to convince them to move away from Steam. Epic Games Store offers an incredible 88/12, but other players are moving as well, like Discord, offering a hard-to-believe 90/10.
These Steam competitors are reacting by offering exclusive content: Deep Silver and Epic Games announced that Metro: Exodus will launch exclusively in the Epic Games Store. Many Steam users felt betrayed because the game was available for a long time in Steam to preorder. Another example is Tom Clancy’s The Division 2 from Ubisoft, which will be available through Epic Games Store and Ubisoft’s own store: Uplay.
While all this change is happening, barely half of Steam users can run the latest blockbuster games on their computers. According to Steam’s hardware and software survey on Fallout 76 and Assassin’s Creed Odyssey minimum requirements, 53 percent of Steam users don’t have the minimum GPU or processor requirements to run the latest triple-A games. These results are astonishing.
In addition to the revenue split, there is another strategic issue that publishers face with digital distributors: customer control. This is as important as the revenue split and now mega-publishers are looking into how cloud gaming could help to address both issues.
Cloud gaming, the game-changer
In terms of market expansion, cloud gaming lowers significantly the entry barriers to games, multiplying the market reach, and making digital stores more viable. There is a general understanding that there´s a gap between the 150 million heavy-duty PC and console gamers today and the 2 billion people playing games in lower spec devices.
EA savvily understood before any other publisher that cloud gaming is the future. They tried to build the technology themselves and acquired Gamefly in 2018 to speed up the process. This move by EA has triggered an acceleration of the transformation of game distribution, and now most of the mega-publishers are determining how to react: create the technology themselves, partner with existing players that have a market proven technology, or acquire.
At the same time, big players such as Google, Microsoft, and more recently, Amazon, have announced their own game streaming solutions. All these moves put pressure on other players that are badly in need of a neutral or proprietary technology. Unless publishers integrate streaming technology into their platforms, the disintermediation will continue from Steam to Internet giants.
Digital stores need to undergo a radical transformation, too, if they want to remain in this rapidly changing ecosystem. The disintermediation process between game developers and users won’t slow down but specialized e-stores have the advantage of already “owning” a huge community of gamers and a wealth of knowledge on the user´s wants and needs. Transforming these digital stores from downloads into streaming is also a possible path these players can take to fight against Internet giants like Google, Amazon, and Alibaba who are already taking positions in the cloud gaming market and l threatening the current digital stores hegemony.
5G, another cloud gaming accelerator
5G — the next generation mobile networks — opens new opportunities for cloud gaming as well, driven by the telcos need to promote 5G to their subscribers. In the residential market, given its latency characteristics, there are only a few uses for telcos, including cloud gaming.
Although 5G is rolling out at a slower pace in Europe, markets such as the U.S. and South Korea are going much faster, and telco operators have already begun to deploy their networks and commercialize their offers.
5G’s impact on cloud gaming will translate into two different propositions. First, for 5G-connected homes, catalog subscription-based services will be offered to families to play on TVs or PCs, which is already happening in the US market. Second, when enough mobile coverage is supported (South Korea has announced that 30 percent of mobile users will have coverage by 2020),a whole new market of blockbuster gaming on the move will appear for the hardcore gamer segment. Gaming on mobiles has been limited so far to casual low-spec games. With 5G, this will radically change, enabling a new installed base of millions of mobile devices to be triple-A gaming ready.
5G therefore has the potential to turn telcos into another significant new gaming channel and independent cloud gaming players can partner with these players and enable this huge opportunity.
In fact, several telcos like Verizon are already testing new cloud gaming formats on their 5G networks and are expected to roll out new revenue models within the year. The advent of 5G will shift the gaming industry from hardware to a software-based technology that will emulate the Netflix and Spotify style of success. The question now is who will be able to take advantage of it.
Javier Polo is the CEO of PlayGiga, a Madrid-based cloud gaming company with services commercially available in four countries.