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Published on July 2nd, 2012 21:45
What has Sony bought for its $380 million, and what does it mean for its competitors?
Sony Computer Entertainment is a Japanese videogame company specialising in a variety of areas in the...
www.playstation.com
Sony's $380 million acquisition of cloud gaming platform Gaikai is big news, but it will surprise very few people within the industry. Rumours of the tie-up have been circulating since before E3, and many people expected it to be announced in Los Angeles last month; instead, somewhat unconvincing denials were trotted out, along with the news that Gaikai had struck a deal to build its technology into Samsung TVs. An acquisition deal was always inevitable, though, and it's taken less than a month after the show for one to materialise.
Why inevitable? Because that's what Gaikai was built for. There are start-up companies which are designed for the long haul, with a long-term business plan and perhaps even the chance of an IPO down the line, but Gaikai was not one of those companies. Rather, it fell into a second category - the sort of start-up which is designed to rise fast and far off the back of great technology and intense self-promotion, to garner as much attention as possible, and ultimately to be acquired by a larger firm as close to the top of the trajectory as possible. If it hits that target, everyone makes millions - think Instagram, or Draw Something. If it misses, though, it crashes back to earth with absolute finality, because there's no real business plan for the long term - no way to make money as a standalone enterprise.
"There's no question that cloud gaming companies today exist to be acquired. There's no real market for their products yet"
Gaikai's founders might deny belonging in that category (they would have yesterday; they might not today), and OnLive's certainly would, but there's no question but that cloud gaming companies today exist to be acquired. There's a simple reason for that - there's no real market for their products yet. There will be; everyone knows that. But right now, the technology platforms they're espousing are running ahead of market realities by a matter of years rather than months. The world isn't ready for cloud gaming, which means that standalone firm providing a cloud gaming platform to consumers has little chance of commercial survival - but platform holders have to start preparing for the day when the world's network infrastructure catches up with the potential of the technology, so the acquisition exit is wide open.
A number of obvious questions arise from the Sony/Gaikai deal. Some of them are strategic - what will Sony do with Gaikai and its technology? How will Microsoft react? What happens to OnLive now? Other questions are purely financial in nature, most specifically, was $380 million a reasonable price and what does it mean for the valuation of Gaikai's competitors?
From a strategic standpoint, there's an expectation in some quarters that streaming technology will eventually replace client-side gaming entirely, with Sony's Gaikai acquisition already being trumpeted as proof of this "inevitable" market movement. The reality in the short- to medium-term will be much less dramatic. PlayStation 4 is not about to become a $99 thin client for cloud gaming; it will be a powerful client-side gaming console with lots of storage for digitally distributed titles and a Blu-ray drive for boxed titles. It will also, however, use Gaikai technology, not to replace the existing functionality of game consoles but to supplement it.
What Gaikai promises, rather than an alternative path forward for high-end gaming, is a variety of new opportunities at the low- and mid-range of the market. It's a fantastic option for selling access to a back catalogue, for example, and should provide Sony with many new opportunities to monetise the impressive back catalogue of PlayStation, PS2, PSP and PS3 titles. Those opportunities are not merely technical (although this should, in theory, eliminate some of the barriers to making legacy titles available on new systems), but also commercial. Subscription business models or the ability to use back catalogue access as a sweetener for other subscription products are also opened up by Gaikai - and Sony has already demonstrated an affinity for that kind of proposition with PlayStation Plus, which makes an increasingly impressive library of software available to customers for the duration of their subscription.
Gaikai is also, as its founder Dave Perry has been keen to emphasise from the outset, a great marketing tool. As game demos have grown in size, now often clocking in at multiple gigabytes, they've become less and less appealing to consumers - many of whom, especially in the United States, face tough bandwidth caps from their ISPs. Streaming offers a chance to let players try a game instantly without the inconvenience of a large download. It's a lot less appealing for a full game (the visual quality and input lag will be worse, while streaming a full game would probably
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