Alphabet: Why Cloud Gaming Makes (Ad)Sense

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A New Challenger Approaches

Google and its parent company, Alphabet, are not companies typically associated with PC gaming. However, in 2018, Google announced a limited-time, cutting-edge game streaming platform: Project Stream. The platform used Google’s infrastructure to run a video game, Assassin’s Creed Odyssey, on cloud servers and transmitted user input and gameplay back and forth between the user and Google. This configuration ensured that, regardless of hardware specifications, users could play resource-intensive games so long as they had a stable internet connection.

While this concept of running games off-site is not new, Google’s trial demonstrated that relatively complex games could take advantage of such a system with minimal lag. Judging from user feedback, Project Stream was a resounding success. While the trial lasted just over three months, Google announced in March 2019 that it would be relaunching the platform as a permanent service under a new name: Stadia.

Stadia’s Place in the Alphabet

Rather than building out Stadia as a standalone product, Alphabet should use the platform to drive new value to its core advertising segment by collecting users’ behavioural data.

Alphabet classifies its operations into two business segments: Google and Other Bets. The latter contains emerging businesses which the company deems “not individually material,” but which have great potential in the medium to long term. While Stadia does offer the potential to generate revenue for the company, the opportunity pales in comparison to what could be unlocked by projects in Other Bets like Waymo, Alphabet’s venture into selfdriving vehicles.

To put this into perspective, the Entertainment Software Association estimates that 150 million Americans played video games regularly in 2018. If Stadia implemented a subscription model of $10 per month, Alphabet would
have to capture 10 per cent of the entire U.S. gaming market just to increase 2018 revenues by 1.3 per cent. Instead of focusing on Stadia as an immaterial revenuegenerating opportunity, Alphabet should position Stadia as an ancillary service—similar to Gmail and Google Maps— to bolster its core advertising business, which accounted for 85 per cent of 2018 revenues.

Using Stadia to Power Personalization

Video games have evolved far beyond arcade-style games like Pong and Space Invaders; many modern games give the user freedom to define the games’ objectives and ask users to make a myriad of choices to determine the games’ outcomes. Alphabet should gather data on the decisions made while playing video games through Stadia and use the collected information to better target Google’s ads. There are countless instances in a video game where players must make a choice to proceed and by keeping track of choices, Alphabet can develop a Google account-linked behavioural profile for the user.

For example, a game may present players with the option to purchase either Item A or Item B. Item A is highly cosmetic but expensive and rare in the game, serving as a status symbol among players. Item B, on the other hand, is reasonably priced but common among players and practical for gameplay. In this scenario, the player’s selection could help Google determine whether an advertisement for a luxury winter coat like Canada Goose or a more accessible one like The North Face would have the highest chance of generating a sale when displayed to the player.

This data is most applicable when collected from multiplayer games with virtual economies, since in-game currency must either be purchased with real money or earned over long periods of time. With both time and money at stake, the player’s spending decision will be more deliberate and indicative of real-life behavior.

While the in-game decisions made by a player do not perfectly map to his or her exact offline behavior, the insights that can be gleaned are substantial. For example, a player’s choice of virtual race and class seems to correlate with his or her real-life political and ideological leanings. Such material insights from seemingly inconsequential in-game decisions suggest that a player’s gameplay can lead to consumer understanding that Alphabet may not otherwise have been able to obtain.

Social Network

Alphabet could also take advantage of the social aspect of online gaming to better understand shared mindsets in a community. The company currently lacks a large presence in the global social media space: Google+, meant to challenge Twitter and Facebook, recently announced it would be shutting down its consumer-facing service in April 2019 after it failed to achieve widespread use. By offering Stadia, Alphabet could gain access to the list of Google accounts with which a player associates alongside other information, including the type and frequency of communication among players. By analyzing a player’s social network, Google can make more accurate predictions about users through interests and habits shared among the group.

For example, assume Google has in-depth profiles for two users, Kayla and Sharon, whose interests are remarkably similar. Kayla and Sharon frequently play and chat with their friend Gary on the popular game Fortnite, but Google lacks a substantial amount of information about Gary’s preferences. Under this recommendation, because Kayla and Sharon share preferences and associate with Gary, Google would be able to infer that Gary shares similar interests with Kayla and Sharon.

A Virtuous Feedback Loop

The data collected through Stadia would be beneficial to game development studios. Alphabet could share data from this platform, as well as from its other services, to give these studios a better understanding of the characteristics and preferences of their players. This would allow Alphabet to tailor future releases and downloadable content to its current user base’s preferences, in turn better retaining players.

The data could also be used to recommend games to players given their existing preferences. Firms such as Netflix have succeeded in streaming by acting as a broker between consumers and content consumed. Netflix’s focus on data analytics to drive customer engagement via Cinematch, its movie recommendation engine, has been credited as largely responsible for the company’s success. Given that Alphabet counts analytics as one of its core competencies, an analogous recommendation system should be developed for video games through Stadia. The platform would be able to continuously guide users to games suited to their interests while collecting more diverse data to develop Google’s behavioural profiles.

Implementation Strategy

To accurately record users’ in-game choices, developers would need to incorporate data collection checkpoints into their games. Even with the incentive of being exposed to a large end-market with Stadia, developers may still be unwilling to include this feature or might demand unreasonably large compensation for doing so. A reliance on third-party publishers is also risky as successful content could lead to unreasonably high licensing costs. To illustrate, Netflix reportedly paid around $100 million to WarnerMedia for the rights to stream Friends for one year.

Google has already moved to mitigate this risk with the announcement of Stadia Games and Entertainment, its own game development studio. Starting a game studio from scratch, however, slows down the large-scale rollout of Stadia’s data collection capabilities. Triple-A titles have average development times of two to three years; should Stadia’s first few releases not enjoy immediate success, the platform risks delayed adoption while new games are being developed.

Instead, Alphabet should look to acquire game development studios that already own popular titles into which it could then integrate behavioural surveying. This acquisition strategy is what Microsoft used to grow its game development studio in the early to late 2000s. During that time, Microsoft acquired Bungie, which has since produced the massively popular Halo series, and Ensemble Studios, which produced the Age of Empires series.

One potential acquisition target is Take-Two Interactive, the studio responsible for high-profile games series including Grand Theft Auto, Red Dead, and the sports-centred 2K. By acquiring Take-Two, Alphabet would have immediate ownership over unreleased games already published and a continued stream of presumably successful future games. Take-Two has significant drawing power with its titles: Red Dead Redemption 2 had one of the most successful launches in gaming history.

The wide-ranging appeal of these games coupled with their relatively high hardware requirements make them perfect for an initial foray into cloud gaming for users unable to play these games at their full fidelity. Additionally, Google’s advertising capabilities would reduce marketing costs for major video game launches, which can amount to 75 per cent of development costs for the best titles.

Why Alphabet?

While competition within cloud gaming is likely to be intense, with existing pressure from Microsoft’s xCloud offering alongside that from potential new entrants,
Alphabet maintains a core advantage over other players. Unlike competing services, Google’s core capabilities revolve around search and targeted advertisements; the company’s ability to connect accounts across a variety of services and synthesize insights from multiple sources best positions it to capitalize on a system for cloud gaming. While behavioural data itself could be recorded and analyzed by anyone who can develop a similar product, the data’s value is most useful if it can be both interpreted to yield the most insights and monetized by optimizing advertisements. This is especially important as Google looks to compete against players like Amazon and Microsoft, who have similar data analysis capabilities but lack the advertising reach.

Additionally, the firm’s core search business requires minimal capital investment to drive its growth. As of December 31, 2018, Alphabet held more than $16 billion in cash and cash equivalents alongside another $92 billion in marketable securities. A portion of these assets could be deployed on the acquisition and with the best game titles costing upwards of $200 million to market and develop, Alphabet has the resources required to fund future development. The company’s culture furthermore supports risk-taking and “moonshot” projects, so the unconventional acquisition of a video game development company would not be entirely unrealistic.

To minimize privacy concerns, Stadia’s terms and conditions would communicate that data would not be sold to external parties but would solely be used to improve the user’s experience with Alphabet products and services. Ultimately, if Stadia offers enough of a benefit to users, most users’ privacy concerns, if any, would be outweighed by the service offered.

Moving Forward

In the future, Alphabet can continue to strengthen its position and data collection capabilities by acquiring and partnering with game publishers. As a consistent source of behavioural information, Stadia data could be used to bolster Alphabet’s advertising capabilities and shared among the other business segments to help the company innovate in a sustainably superior way.