Google has entered the videogaming industry. Its competitors should be terrified but instead they’re in denial – The Independent

As students of disruption, it never ceases to surprise us to see the same pattern repeating itself in industry after industry. When powerful incumbent firms are threatened with disruption, their first reaction tends to be denial. This is followed by derision and then by doubling the investment in existing technology. 

The pattern is also true of the $131 billion videogaming industry. Microsoft’s gaming head, Phil Spencer, said that console hardware is here to stay while videogame streaming is “years and years away” from becoming mainstream.

His reaction follows Google showcasing its upcoming Stadia gaming platform, including at the big Gamescom event last month in Cologne. Cloud-based Stadia allows gamers to play high-end, computationally intensive games on multiple screens (TVs, PCs, tablets and mobile phones) via a monthly subscription and a high-speed internet connection. And they don’t even need a console.

Put simply, Stadia threatens both the core competence and the business model of Sony, Microsoft and Nintendo, who have long dominated the videogaming industry. Each makes the majority of their profits via revenue shares from third party games and returns from internally developed exclusive games. In other words, Google’s console-less streaming could make its competitors’ capabilities in hardware redundant.

For years, streaming could not replicate the experience that consoles provided because of poor visual quality and slow response times. This made a console or PC the default option, as both have a near instantaneous response. These problems are almost completely solved now: with a fast-enough internet connection, videogames running on Stadia are likely to look and play as well as their console counterparts and even get closer to high-end PCs in both frame rate and visual quality.

Because of this, Phil Spencer’s comment reminds us of Kodak CEO Colby Chandler’s reaction to digital imaging, who said: “[…], electronic cameras are unfeasible because people liked color prints and digital technology does not deliver a high-quality set of prints as yet.”

Spencer takes solace from the fact that it took Netflix many years to become mainstream. Unfortunately, that skirts the real issue. Kodak had 25 years to adapt to digital imaging and it still couldn’t. Incumbents often struggle to respond to technological change due to four factors: they do not want to let their capabilities honed over decades become redundant; they also don’t want to let go of fat profit margins; they fear cannibalising themselves; and they struggle to shift business models.

Once the slower-moving companies come out of denial, it will be a significant challenge for a fixed specification console to begin competing with what is going to be a moving performance target in the cloud. A similar example was Blackberry’s fixed physical keyboard competing with the iPhone’s far more dynamic screen-based interface.

The companies might try to lower prices, but that alone does not counter a disruptive new business model. Stadia’s pro package provides a stream of free games and access to its highest end game performance for $9.99 a month. With Stadia, gamers can enjoy next gen games for 40 months on a subscription instead of paying for a new console upfront. That gap is hard to close.

Google carries minimal baggage. By hosting the equivalent of a console in the cloud, hardware costs can be shared between multiple “owners”. For competitors, that is simply not possible. Google’s platform is likely to grow exponentially: the list of third party developers around Stadia has shot up to over 4,000 companies, including many heavyweight publishers.  

To complicate matters, as the ecosystem evolves more players are likely to enter, with content makers entering the streaming side of the platform business. Like Apple, Disney+, WB/HBO, expect Amazon, Valve, EA, 2K, Ubisoft, and Bethesda to push for their own versions of game streaming platforms bundled with their content library. This could eventually lead to multiple subscriptions and perhaps some industry consolidation.

If the incumbents wish to position themselves strategically in this emerging ecosystem, such as by selling physical manufacturing and distribution of hardware consoles to a third party and focusing on developing a new business model, the time is now. If they choose to wait until Google is fully entrenched, it will be too late.

Dr Kamal A Munir is associate professor of strategy and Hamza Mudassir is a technology consultant and visiting fellow at the Judge Business School at Cambridge University