It has been a long time since Sony made a really smart strategic move — long enough to make you wonder whether they had it in them. But the acquisition of cloud-gaming service Gaikai for $380 million has the potential to be a winner.
As a threshold matter, there’s the deal itself. Although Sony was rumored to be pursuing Gaikai’s larger and more established rival OnLive, the fact that Gaikai’s business is less mature likely means Sony is paying a smaller premium for Gaikai’s assets than it would have had to pay for OnLive’s. Gaikai isn’t likely to be generating meaningful revenue at this point from its one-cent-a-minute streaming-as-a-service business model, but Sony isn’t interested in Gaikai as a going concern anyway. It wants Gaikai’s technology and cloud infrastructure to spare Sony the time and cost of building it itself.
More important, though, the deal has the potential to pay both near-term and long-term strategic dividends for Sony. Here are four key ones:
1) Improved PlayStation 4 margins: The fixed, living-room video game console is entering its twilight years but it isn’t done yet. Sony can’t avoid bringing out one more generation of PlayStation. The window of time for recouping the development and initial manufacturing costs for the next generation of consoles, however, before mobile gaming and cloud-based services turn them into expensive pieces of furniture, is certain to be shorter than it was for the PlayStation 3. That makes it imperative that Sony keep costs and time-to-market down for PS4.
By integrating Gaikai, Sony will be able to shift some costly functionality that provides little long-term payoff, like maintaining backward compatibility with older-generation games, out of the PS4 box and into the cloud. Cloud-assisted processing could also reduce the processing and power requirements of the PS4, further reducing costs. Those savings should accelerate the cost-recoup curve and improve hardware margins in the long run.
2) Rescuing the Vita: The Vita hand-held game player was an expensive development project that has so-far met with tepid response from gamers. A big part of the problem, gamers say, has been a lack of compelling content for the device. Only in the last few weeks, with the release of a few high-profile titles for the hand-held, have Vita sales begun to show real signs of life. Integrating Gaikai with the Vita, however, would enable Sony to expand the roster of games available on the hand-held quickly, perhaps rescuing it from permanent also-ran status to Nintendo’s market-leading DS portable.
3) Reaching non-Sony devices: While improved hardware margins and portable sales are crucial to Sony in the near-term, games are moving inexorably away from dedicated, high-horsepower consoles to the full range of connected devices. While the market for console games won’t disappear altogether, in the future the dominant game publishing platforms, where the biggest margins are in the game business, will not be tied exclusively to the dominant game hardware platforms. For PlayStation to thrive as a publishing platform going forward it will need to be virtual-ized so it can reach non-Sony hardware. Gaikai will help Sony make that transition.
In the near term, the ability to reach non-Sony device via Gaikai also gives Sony an answer to Microsoft’s SmartGlass technology. With Gaikai, Sony will be able to support the same sort of synchronized, multi-screen gaming experience as SmartGlass by incorporating non-Sony tablets and smartphones into the PlayStation ecosystem.
4) PlayStation Network backbone: While Sony execs say the first priority for Gaikai is gaming, they have also made it clear that leveraging Gaikai’s cloud infrastructure and distributed streaming architecture for non-game content is part of the long-term plan. “It’s recognition on Sony’s part that the cloud and cloud streaming technologies are going to have profound and possibly a very positive impact on not only our game business, but also in the way our consumers interact with and obtain content in general,” the head of Sony Computer Entertainment Andrew House told the Wall Street Journal.
Perhaps the most encouraging aspect of the Gaikai deal, however, is that it happened at all. Sony has a long and unfortunately history of devotion to its own home-grown, over-engineered formats and technology regardless of what’s happening in the rest of the market. For Sony to be placing a major strategic bet on technology not created by Sony engineers is a refreshing change.