Market Insight

Gaikai acquisition: Sony Computer Entertainment makes positive move to deliver 'One Sony' target for games

July 03, 2012

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Sony Computer Entertainment announced it has agreed to acquire games-centred, video-streaming technology and network company Gaikai Inc. for $380m. SCE's aim is to build a video-streamed games on demand service based on Gaikai's infrastructure to bring cloud gaming to PlayStation devices and also extend the PlayStation Network platform and games to a variety of connected devices beyond the traditional specialist TV and handheld consoles.   

The acquisition of Gaikai's streaming technology and network is an essential building block in Sony's wider ambition to bring the PSN platform and its games to connected Sony platforms beyond the console. SCE has laid its cards on the table and taken the acquisition route instead of trying to build the distribution and compression technology in-house and build out its own cloud games infrastructure. While undoubtedly paying a premium for Gaikai's assets and existing business, Sony has saved itself 2-3 years of technology development and network build-out. Such a benefit is hard to value within the existing competitive landscape. Although unconfirmed, it could also help enable SCE's multiscreen vision for PSN on non-Sony devices which the company has just begun to investigate with its PlayStation Mobile (previously Suite) initiative.

Unlike Microsoft, Apple, Google and Amazon, Sony's wider cloud infrastructure is under-developed. This acquisition gives the company a head start in what will be a significant and complementary distribution capability aligned to the roll out of next generation console platforms and other connected Sony devices. It is likely that Microsoft is either building its own games streaming technology or that it will make a move to acquire specific compression technology if required. IHS Screen Digest believes Microsoft has limited interest in acquiring an existing network or consumer facing service, such as OnLive, which would command a far higher premium than Gaikai due to its investment in building and marketing its own operation. Microsoft is currently building out its own very large data centres to deliver on a cloud based future and it is likely that any streaming deployment would be made within that existing infrastructure.

This deal also works for Gaikai. The company has invested large sums and leased a significant volume of servers when building a network that, at present, is largely unused. Although the company has been busy with a number of co-branded partnerships, specifically with CE companies such as LG and Samsung, it is far away from generating any significant or meaningful revenue from its 'utility' one-cent-per-minute-of-streaming model. Indeed, the decision of Gaikai's investors to exit at this stage is more than likely an indication that the company was bleeding significant infrastructure running costs, with at least 2-3 years of operation before any realistic chance of substantial income. As such, the utility model followed by Gaikai remains unproven. IHS Screen Digest already had question marks over the scalability of this model taking into account the cost of infrastructure needed to support gamers and the revenue sharing necessary on CE devices beyond the open PC platform.

This acquisition dismantles Gaikai's market positioning as a neutral network with a number of operator partnerships. The fact that Sony holds a competitive position against all of Gaikai's key CE partners suggests that this deal is unlikely to impress LG and to a lesser extent Samsung. LG has more to lose as it is further down the line in planning for its own Gaikai powered streaming service. Unless SCE takes a watershed decision to serve its content to third-party connected TVs and in effect removes what could be a differentiated feature-set for future Sony TVs, the likelihood of this service now being reconsidered must be high. Even so, with the flip of Gaikai's business model away from relying on these third-party relationships the acquisition represents a best case for Gaikai under the current market conditions and SCE represents a strong fit.

IHS Screen Digest has always held the view that the next generation of consoles would utilise hybrid distribution models. At launch we expect them to offer physical media drives and content downloads as they do today and that in time streaming services will also be deployed. This move by SCE suggests that the timeframe for deployment of VSGoD services on consoles could now come earlier, although adoption and roll-out will continue to depend on infrastructure, content, usability and quality of consumer connectivity. We will be reviewing our VSGoD forecasts following this industry development and will notify clients of any changes to our forecasts.

The confirmation that console manufacturers will deploy VSGoD services undermines some of the differentiation held by companies such as OnLive, in particular, immediate access to content and community features such as the OnLive game viewer. OnLive will retain a significant advantage versus streaming direct to a next generation Sony console in that adopters will not have to spend money on a new console. However, SCE now has the option to follow a more PSN-platform centric model across different types of device, which will allow the company to unhinge high-end PlayStation games content from its specialist devices. The company will need to find a balance between extending its content proposition to a wider global audience and serving a larger number of connected device categories, while still optimising support for its specialist devices, at least for the next console generation.

This extending strategy will be relevant to other connected Sony devices or even possibly to third-party devices if it makes commercial sense to the company, although at this stage it is clear that the company's priorities are to support sales of its own devices. As such Gaikai's technology is important in supporting Sony's TV division, which is under particular commercial and competitive pressure at the moment. IHS Screen Digest's forecast of over one billion active connected TV devices across the world by the end of 2016 underlines the significance of this device category for future entertainment content distribution including games. 

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