Cloud Computing Changes Everything

Cloud Computing Changes Everything

Cloud computing is transforming all types of software businesses, but the changes are playing out differently by industry – video games included. In enterprise software, which yours truly covers for Gartner, the change is most visible in software-as-a-service (SaaS) businesses like Salesforce.com. Small- and medium-sized companies are all jumping onto the SaaS bandwagon, because it lets them have access to capabilities that previously required expensive software from companies like Oracle and SAP. In a sense, SaaS levels the playing field for small businesses (e.g. game developers, publishers and more), putting them on near-equal footing with giant billion-dollar-plus companies, at least where IT is concerned.

Cloud Gaming – Streaming to a Netbook Near You

There are parallels between SaaS and what’s being called “cloud gaming” – delivering streamed games on-demand to players who don’t want to make expensive hardware investments. Unlike business-oriented SaaS solutions, however, for which customers are generally charged on a pay-as-you-go model, cloud gaming services like OnLive require the player to pay retail prices or high fixed costs for access. This licensing model is a mismatch for a service positioned at cost-conscious gamers, and for cloud gaming to realize its true potential, various channel participants (developers, publishers, cloud gaming services, etc.) will have to agree on realistic prices that prompt higher levels of consumption while equitably slicing up the revenue pie. Think of what Netflix and Hulu do for streamed video – viewers pay one low monthly price for all the movies and TV shows they can eat. Large game publishers with high-cost structures are understandably worried.

Cloud Services as Gaming Retailers

If you’ve bought games via digital distribution, you’ve consumed them through a cloud service. Valve’s Steam is the original cloud computing game distribution system. Today it is joined by a slew of similar services, from Blizzard to Facebook. The key for these distribution systems is solving the chicken-and-egg challenge of any marketplace – tapping into enough potential buyers so that participation by third-party sellers is warranted, and bringing enough suppliers into the market to make it worthwhile for buyers to participate. Successful execution can create a dynamic growth capability, wherein network effects accrued to market participants grow exponentially with respect to the number of market participants.

Companies use a variety of tactics to crack the golden egg. Some include basic table stakes – easy to use, well-documented programming and/or packaging interfaces, reliable monetization mechanisms, digital rights management, and reasonable revenue splits with game publishers and developers. Additional tricks of the trade include support for game-enriching hosted capabilities (like multiplayer, matchmaking, player-to-player relationship management (a.k.a. “friends”), product recommendation engines, and player ranking systems). Marketplaces must balance their efforts to attract both the gamer and the creator.

Everything Old is New Again: Application Platforms in the Cloud

Cloud computing is a relatively new term, but its underlying concepts and technologies have been evolving for years. What we today call virtualization was called time-sharing on the infinitely-less-sexy mainframe. The Web has been around for twenty years, and the Internet even longer. Computing grids or clusters – what we today call cloud computing data centers – emerged in high-performance computing (HPC) during the ‘90s. The most recent innovations enabling cloud computing – cheap bandwidth, the concept of “elasticity” that encompasses two-way horizontal scalability, and service-oriented architecture – are incremental, or sustaining, improvements, rather than breakthroughs. Taken together, these concepts make SaaS feasible, but more importantly for game developers, when combined with development tools and application middleware (application servers and databases, mostly), they enable the creation of a new class of programming and runtime environment – the platform-as-a-service (PaaS). Just like licensed game engines reduce development costs and improve time-to-market, PaaS makes it easier than ever before for game programmers to build impressive multiplayer games, and with generally lower operating costs to boot.

This PaaS thing has been tried once before, but the necessary sustaining innovations and cost decreases didn’t happen quickly enough, and the first company bearing similarity to modern PaaS – Marc Andreesen’s LoudCloud – never took off. The sharpest game developers took notice, however, and World of Warcraft (WoW) was born a few years later. Blizzard’s WoW platform might not be an all-purpose gaming PaaS, but it does allow the majority of WoW developers to build content and game mechanics without worrying about the low-level details of server management, instance replication and world events. Unfortunately, this platform is not open to third-party developers who want to accelerate the development of an MMO on a reliable foundation. However, other platforms not specifically focused on gaming are available, and with cloud system infrastructure-as-a-service (IaaS) providers like Amazon Web Services, Rackspace, and Microsoft Azure eliminating capital barriers and provisioning times, would-be multiplayer gaming market leaders can “roll their own” faster than ever before.

No Free Lunch, Or a Treatise on the Nature of Disruption

Robert Heinlein once said “there’s no such thing as a free lunch,” and rock star investor Warren Buffet has been quoted as saying “price is what you pay, value is what you get.” It’s very popular to refer to any technology discontinuity as a disruptive innovation, regardless of its impact on this price-value calculus. True disruption, according to Clayton Christiansen, author of strategy classic The Innovators Dilemma, often occurs when a new product or process replaces an existing one on the basis of reduced value with an associated disproportionate reduction in price. This tradeoff is perfectly obvious in the cloud computing phenomenon, which demands we exchange physical ownership for virtual access, dedicated computing and storage resources for multi-tenancy, and retail revenue for pay-as-you go that forces software companies to continually enhance their products. In exchange, shorter time-to-market, reduced operational expenditures, and massively expanded market opportunities beckon.

Another thing that Christiansen can tell us about disruption is that the established leaders often fail to capitalize on it – locked into their existing, market-leading business models, they can miss the sea change until it pulls them under. It is striking that most of the articles publishing lately lamenting the impending doom of the PC games industry seem to come from legacy game industry insiders. The irony being that the guys at Zynga, Valve, and Blizzard are doing just fine, regardless of these proclamations. Translation: It’s a good time to be a gamer, and an even better time to be a gaming startup with structurally low costs.

About Eric Knipp
Eric Knipp (@erichknipp on Twitter) is a Principal Research Analyst at Gartner Research, managing the Application Development (AD) research agenda and personally covering Web and Cloud AD. He covers AD as it pertains to the Web, mobile devices, and cloud computing.

4 Comments

  1. “Translation: It’s a good time to be a gamer, and an even better time to be a gaming startup with structurally low costs.”

    Let’s say that one were to decide to start making games with structurally low costs… how would one go about this?

  2. @Jay

    The cost structures of existing megapublishers like EA, Ubisoft, etc. are heavily influenced by their until-now very successful business model.

    Big teams in plush offices in expensive districts. Big marketing budgets. Media duplication and distribution. Brick and mortar stores.

    The server infrastructure powering many online games is no less opulent. Wholly-owned and operated server farms with highly-paid engineers tweaking the hardware and network infrastructure. Control rooms that look like a scene out of NASA.

    What I’m saying is that the cloud puts you in a position to not have to pay for those things anymore. By commoditizing so many of the capital-intensive aspects of software (and game) development, the door is opened for a new generation of entrepreneurs who want to build the next AAA title.

    Talent wins. Capital is now less of a constraint than it used to be. The cloud makes that even more true.

  3. Will the cloud somehow help me get my hands on cheap graphics, music and sfx?

    I’m a damn fine developer, but I can’t draw graphics worth a sh#t!

    It’s cheap graphics that I’m after!

  4. I think cloud video gaming is the future, given that the technology appears to be in place. Playcast Media has launched a European service in Portugal for ‘All-you-can-play’ games for 10 Euros a month. Is it the end of games consoles? How do you think the console manufacturers will react?

    http://www.playcast-media.com/news/2010/11/11/portugal-telecom-and-playcast-media-launch-high-end-video-ga.html

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