Microsoft-Activision deal: What is 'cloud gaming'?

Technology firms have long dreamt of shifting gamers away from cumbersome consoles and physical purchases to subscriptions and virtual access—essentially a Netflix for video games.

However, on Wednesday the UK's antitrust regulator blocked Microsoft's purchase of Activision largely because it had the potential to kill competition in the still developing "cloud gaming" sector.

How does cloud gaming work?

For decades, the console has been king. Sony's PlayStation, Microsoft's Xbox and various Nintendo units have dominated.

Millions have also enjoyed gaming on their PCs. 

But the arrival of superfast broadband has allowed companies to experiment with new ways of delivering and monetising games.

Rather than buying games and storing information on their personal consoles and PCs, gamers would pay monthly fees, access a suite of games and have their data stored on servers far away.

Doing away with the costs of manufacturing and delivering hardware would allow healthier profit margins and capture whole new audiences.

At least, that's the theory.

How big is the sector?

Some 32 million people were paying for cloud gaming services last year out of a gaming population of more than three billion, according to Newzoo, a data analysis firm.

This translated to revenues of about $2.4 billion, according to Newzoo, with the wider industry worth more than $300 billion globally.

But analysts are largely united in predicting huge growth for the sector, fuelled by rising numbers of potential players.

"It's set to become an industry worth at least $40 billion by 2030, growing by around 40 percent annually according to industry estimates," said analyst Susannah Streeter from Hargreaves Lansdown.

In its 400-page decision to block the Microsoft-Activision deal, the UK's CMA antitrust regulator said the number of regular cloud gamers had more than tripled in the UK between 2021 and 2022.

And it cited the potentially "transformative" impact cloud gaming could have in the coming years.

But so far, it is still a relatively small piece of the pie.

Who are the big beasts?

Microsoft is already the dominant player in the sector. Its Game Pass service has a claimed subscriber base of 25 million.

Its nearest competitor, NVIDIA's GeForce Now, also claims 25 million registered users—though it has a free tier so the figures are not comparable.

Sony and Nintendo have made moves in the arena and telecoms firms across the world are looking at the sector as a way to boost profits from 5G networks.

But these firms are yet to make major inroads and may well be concerned by what they have seen recently.

Google launched its Stadia offering in 2019 trying to build a gaming empire largely from scratch with in-house studios. It shut down less than three years later.

Industry watchers are now expressing doubts about Amazon's foray into the scene—it launched its Luna service in 2020 but it is now reportedly in difficulties.

"Amazon Luna and Google Stadia have the same problem—there simply aren't enough games to guarantee success," wrote Tessa Kaur on The Gamer website.

How big was the UK's decision to block Microsoft?

Microsoft was fuming at the watchdog's decision. 

The firm's usually mild-mannered president Brad Smith told the BBC it was "probably the darkest day" in four decades of Microsoft's involvement in the UK.

He said the firm's confidence in Britain was shaken and hinted at a wider impact for jobs in the country.

But experts were not expecting a huge fallout for the cloud gaming sector.

The obvious immediate effect is that Activision's games, which include some of the most popular titles in the world, will not immediately be available for download.

Tom Wijman of Newzoo was sanguine about this, pointing out that nothing was stopping Activision from making its games available.

But Joost Rietveld from University College London highlighted the promises Microsoft had made to license Activision games to other suppliers, and suggested such a move would have benefitted the entire sector.

"Cloud gaming is still only a fraction of the larger games industry," he told AFP.

"I believe that this acquisition could actually give the space a much-needed jolt." (AFP)