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All aboard the cloud gaming train: Microsoft reveals details of its Project xCloud initiative

October 08, 2018

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Microsoft has revealed details of its cloud gaming initiative – codenamed Project xCloud – which will start testing in 2019 and be based on Microsoft-designed Xbox One hardware blades sitting in server racks in select Microsoft Azure locations around the world. The company states that this is a start of a multi-year journey which will be supported by the build out and availability of next-generation fixed and mobile networks including 5G. Project xCloud is being managed by a new division – Gaming Cloud - formed at the beginning of 2018 and largely drawn from the team that engineered backwards compatibility on Xbox One.    

xCloud will be based on established approaches to cloud gaming, which have been around since the early 2000s. This involves GPU-based rendering of games in the data center, the video output of which is then encoded, compressed and streamed to suitable end user devices. User inputs are then routed back to the server and the loop continues. It’s the same approach used by OnLive, which collapsed back in April 2015, and a multitude of other streaming start-ups over the years some of which are now defunct and others which continue to operate today.

A demo of the service running from an Azure data centre 200 miles from Redmond showed xCloud running Halo and Forza on a pair of smartphones and a tablet with relatively smooth and responsive playback. The tablet version employed a software overlay of an Xbox gamepad as an input mechanism.  

Project xCloud is another illustration of Microsoft’s commitment to the games sector. The company sees interactive content and related services as a key pillar of its consumer and enterprise offering across a number of business units. 

Not just Microsoft

Microsoft’s reveal comes at a time of renewed interest in cloud gaming and mere days after Google announced its own cloud gaming initiative – Project Stream.

Additionally, Sony operates its own cloud gaming service, PlayStation Now; Tencent is researching cloud gaming over 5G networks with Nokia; EA acquired GameFly and is working on its own cloud gaming proposition, while Ubisoft senior management believe that cloud gaming will eventually come to dominate.

This flurry of activity reveals an industry accelerating towards a cloud gaming future driven by a desire to maintain or expand their position in the AAA games market that could be increasingly unhinged from specialist console and PC hardware. All this action is taking place against a backdrop of mass consumption of games content across different devices and screen types, and increasing implementations of cross-platform gameplay and support. 2018 also sees the roll-out of next-generation mobile networks based on 5G technologies. This decoupling from hardware not only opens up AAA games to new audiences and geographical markets it also opens the door to new market entrants such as Google, other cloud companies and telcos.   

What cloud gaming advantages does Microsoft have?

When Microsoft confirmed it was working on a cloud gaming service back at E3 2018, it was clear that the company would be well positioned to deliver an end-to-end solution. Microsoft groups its capability into three areas: content, community and cloud. The Xbox platform is home to a large portfolio of content, it has a large community of 60 million active users through its online platform Xbox Live and it operates as one of the world’s largest public cloud vendors. Microsoft also operates Xbox Game Pass which is a model that can be applied to this new form of distribution. Its decision to include Microsoft-published new releases in Xbox Game Pass is a major differentiator. 

Compared to Sony and other games publishers the key competitive advantage Microsoft has is its Azure cloud business. Under the model of video-streamed cloud gaming, the ongoing locating of servers, GPU compute, hosting and streaming charges are a significant cost to the operator, so having this in-house is a major commercial advantage. However, even Microsoft still needs to deploy the Xbox-based servers to run the service, which is capital intensive. These servers will also be taking up space in Azure data centres which could be used for other applications, so there is an opportunity cost to be considered as well.

What does this mean for Xbox hardware?

At this stage, not a lot. Microsoft continues to work on a next-gen console which will supersede the Xbox One X and it has been clear that it believes that cloud gaming will be an incremental opportunity for Xbox for the foreseeable future.

What is interesting is that xCloud will initially be built using Xbox One S hardware. Although Microsoft states that the infrastructure will be easily updated in the future, this suggests a few things. First, that a commercial service will launch sooner rather than later and quite likely before the end of 2019. Second, Xbox One hardware fits with the idea that this service will be targeted at mainstream, late adopters that have yet to buy into current generation of consoles. This audience could be in existing geographical markets and also in countries where console gaming is under penetrated.  

Please note: We will be publishing a new report - 'Next-Generation' Cloud Gaming - in the coming weeks, where we will examine the implications of new market entrants and new networking technology on the dynamic of the industry.   

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