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Microsoft's new cloud gaming service is more about the cloud than gaming

Project xCloud is no Netflix for video games, but it could still turn into a massive business opportunity.

Xbox Game Pass app

Coming soon to an iPhone near you?

Photo: Rafael Henrique/SOPA Images/LightRocket via Getty Images

Microsoft is getting serious about cloud gaming. The Xbox maker will add its Project xCloud game-streaming service to its Game Pass Ultimate subscription tier in September, Phil Spencer, Microsoft's head of gaming, announced in a blog post Thursday morning. This will enable Game Pass Ultimate subscribers to stream more than 100 games directly from the cloud to compatible phones and tablets.

xCloud may not be the much-touted "Netflix for games" just yet — but for Microsoft, that may not even be the ultimate goal. The company's positioning of cloud gaming as an add-on to an existing service shows that even with its gaming division, everything still goes back to selling more-lucrative cloud services contracts.

Microsoft first began testing Project xCloud with a handful of games in September, and the company isn't alone in using the cloud to deliver console-quality games to less powerful devices. xCloud is competing with similar services from Sony, Nvidia and Google, and there have long been rumblings about Amazon developing its own game-streaming service.

Microsoft revealed earlier this year that it now has more than 10 million paying Game Pass subscribers. The company didn't break out how many of those subscribers are paying for the $15-a-month Ultimate tier, but xCloud could be a powerful upsell incentive: xCloud users will be able to play games together with close to 100 million Xbox Live subscribers, begin a game on their Xbox, and then continue at the exact same spot on their mobile device, "just like you do with the popular movie and music streaming services," as Spencer put it.

That being said, the service will only be available in some markets, and it's still unclear whether xCloud will be available on iOS devices, as Apple has blocked similar moves in the past.

xCloud might be likened to Netflix and Spotify, but the fact that it is being positioned as an add-on to an existing subscription tier shows that the company isn't quite there yet. The same is true for Microsoft's key cloud gaming competitors: Sony's PlayStation Now service is based on a similar all-in subscription model, offering access to over 800 games for a monthly fee of $9.99, or $60 annually. However, PlayStation Now is thus far only available on PCs and the company's PS4 console, and the company hasn't committed to mobile game streaming.

Google's Stadia service does bring console gaming to mobile, albeit without a real console. Consumers only need a compatible controller and a Chromecast Ultra streaming adapter to play Stadia games on their TV, and the service is also available on mobile and PCs. But while PS Now and xCloud are based on an all-you-can-eat subscription model, Stadia instead relies on a more traditional pay-per-game business, while offering a limited number of "free" games to consumers who pay $10 per month.

Nvidia's GeForce Now offers consumers the ability to stream games they already own as well as free-to-play games to mobile devices, underpowered PCs, and the company's own Nvidia Shield TV streaming device. This approach has faced significant pushback from game publishers, many of which often strike platform-exclusive deals with mobile, PC and console app stores. Some major publishers, including Activision Blizzard, have removed their titles as a result, which could help explain why the service has seen a somewhat slow start. Earlier this year, Nvidia said that the service was used by "hundreds of thousands of members." For comparison, Sony's PlayStation Now service hit 2.2 million paying subscribers in May.

However, for Nvidia, Google and Microsoft, cloud gaming isn't just about paying consumers. The companies are also looking to strengthen key parts of their existing businesses. In the case of Nvidia, that business is selling chips. "Cloud gaming helps to democratize ray tracing and also drive developers to optimize for low-latency as well as decouple the gaming experience from the PC," said Moor Insights & Strategy analyst Anshel Sag. In other words: Nvidia's end game is about enabling cloud gaming as an industry, not necessarily running a cloud gaming service. "It's about moving more GPUs by doing all that," he said.

Google and Microsoft, on the other hand, have been busy competing with each other in the cloud computing space, and cloud gaming is just another application to run on their cloud infrastructure. "It's 100% about Azure vs. Google Cloud Platform," Sag said. Stadia could be a powerful case study as Google is looking to sell cloud streaming technology to the video game industry — in much the same way that Amazon built a cloud computing infrastructure to support its own store and then started selling that technology to other businesses.

Likewise, xCloud may help Microsoft sell additional Game Pass subscriptions, but the resulting revenue is chump change compared to lucrative cloud computing contracts the company could gain from selling xCloud's technology to publishers who may want to control their own streaming library of games instead of giving a cut to a third-party streaming platform. In the last quarter alone, Microsoft's commercial cloud business generated over $13 billion, a jump of 39% over the same period the year before. "Everything Microsoft does as a company is framed around one question," Sag said: "Does it drive Azure usage?"

The same is likely true for Amazon's efforts, which are now pegged for a 2021 launch. However, cloud gaming services do need to have access to popular titles to attract enough interest from consumers. That puts Microsoft, which operates more than a dozen game studios in-house, at a key advantage over the competition. Case in point: Amazon's first in-house game, Crucible, bombed so badly that the company pulled the public release just a few days after its launch.

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