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Business & Economics

The future of Google Stadia – an advertising platform?

Summary

  • Stadia was officially announced at GDC in 2019 and released at the end of the year. It has become a well-known Cloud Gaming platform.
  • Google did not have the best of launches for Stadia, games library and infrastructure being key reasons.
  • We were surprised to find no mention of video games or Stadia in Google’s annual accounts. However, by delving into the accounts we were offered an insight into the future direction for Stadia.
  • At the end of the day Google has one core purpose, to sell advertising. Stadia will need to move beyond being just a branding and intellectual challenge for Google, and demonstrate an ability to engage with advertising to remain strategic to the business.

At GDC 2019 Sundar Pichai, CEO of Google, announced Stadia. The keynote presentation lasted an hour and detailed how they expected to use their cloud technology and engineering prowess to solve one of gaming’s long-standing issues – streaming a game to a player via the cloud.

Google released Stadia with a sizeable amount of fanfare. Following the GDC announcement they produced a large stand at Gamescom with live demonstrations (and long queues), while on social media the platform has generated a notable following – with more than 4x the followers on Twitter than their closest rival Nvidia GeForce Now.

However, the initial release of the platform was poorly received. WIRED went as far as suggesting it could be the next casuality in Google’s ‘graveyard of killed projects’. This may be a little over the top, but issues were rampant. Users couldn’t stream a game reliably, the amount of games available wasn’t up to scratch, and there was general confusion as to why you would pay a monthly fee for the service but still have to rebuy all the games you probably own already on other devices (at full price).

The promise of Stadia however is huge, both for the games industry and for Google.

Google Stadia uses their proprietary cloud infrastructure and software to stream games via Google Chrome, or devices connect through the Stadia App.

As this is all hosted and held within the cloud it allows developers to create games without the restrictions of hardware (the console cycle).

Stadia also opens up gaming to anyone with Chrome and more broadly anyone with an internet connection, and manages to do this while at the same time linking in seamlessly to the Google product continuum; utilising Google Chrome as playing platform, YouTube as the sharing & social platform for your gameplay, and Google data centres as the host.

As a brand exercise it is an impressive example of how Google can disrupt an industry using all of the best parts of its business.

But one thing we noticed, and the inspiration for this post, is that Stadia is not mentioned once in the Google (Alphabet) annual accounts. We wanted to understand why this was, and also to use what is present in their annual accounts to answer the question: what is the future for Google Stadia?

What do the annual accounts tell us about the future of Google Stadia?

Looking through the Full Year Annual Accounts for 2019 and the Q1 Accounts for 2020, the single only mention of video games is with regards to the threat that video game consoles may have on attrition of customers away from Google products.

Alphabet Full Year Annual Accounts 2019

Stadia, while not immensely popular right now (an estimated 225k users following a free trial), has been built off the back of a large amount of investment and PR with some analysts running off the high expectations for the platform by predicting there will be 8.3 million subscribers within three years (Ryan Gee, Bank of America). To not read a single mention in Google’s accounts is certainly surprising.

It is expected Google Stadia sits under ‘Other Bets’.

Alphabet Full Year Annual Accounts 2019

Even so, taking into account Ryan Gee’s thoughts on growth, Stadia would generate total revenue of approximately $890mn by 2023, which is twice as much as all of Googles ‘other bets’ combined – the segment of Google Stadia is expected to be sitting within currently.

A cynic might read the annual reports and suggest that management aren’t buying into Stadia. Certain aspects of the Stadia launch indicate this: Sunar Pichai’s first words on stage at GDC in 2019 were ‘I’m not really a big gamer’ and his suggestion that ‘FIFA 19… it’s so immersive’ was ridiculed by most in the comments section.

GDC Announcement of Stadia – YouTube 2019

However, ultimately what we do learn from the annual accounts is that Google – at its core – really only ‘does’ one thing.

Advertisements.

As of December 2019 Google’s advertising revenues as a % of Google total revenues was 83.9%. This is slightly lower than the year prior (85.4%) but sends a clear signal on what Google’s shareholders and management are focused on. The ‘Other Bets’ section generates 0.4% of the total business revenues, and is broadly defined as Google using its technology prowess to try and solve big problems across industries.

Therefore, in the perspective of a hardnosed businessman, it may come as no surprise that Stadia is not mentioned in the accounts – it is simply such such a small part of the business. Even if it did grow to the size Ryan Gee at Bank of America expects, it would still contribute less than 1% of total Google revenues.

Naturally if Google is an advertising business, does this also suggest that Stadia will move in that direction? We have already been sold the idea that Stadia integrates smoothly into YouTube; for example, while watching a video of a streamer you will be able to jump into that game and begin playing in ‘less than 5 seconds’.

This could open up many different avenues for revenue generation. Epic Games could run Fortnite advertisements before a YouTube video encouraging you to jump in and play there and then. You could very easily find yourself playing a game, when you were really about to watch a video providing tips on reducing procrastination. Great for Alphabet and Epic Games shareholders (maybe not for you…).

There is also a wider growth of in game advertisements. Riot Games recently started adding in game adverts to League of Legends, a trend that was long anticipated given the issues esports have with monetising.

Advertising Enters Video Games At A New Angle Through Esports 05 ...

With Stadia’s natural integration into Google Chrome it is possible that, rather than using links to jump into a game, you may end up using links to jump out of a game. In the future you may be able to click on an in game advertisement, which will add that product to a cart, to be purchased once you’ve finished your gaming session.

With developers and publishers under increasing pressure from shareholders to produce less lumpy AAA game driven cash flows; adding in game advertisements may be key. Stadia + Chrome may be the best development ground for this, and it’s very likely a game such as Call of Duty Warzone with 50 million players would likely get a good price for advertising space within their games, encouraging developers to get involved. With Google’s acquisition of Typhoon in 2019 maybe they will test this out with their first Google branded game.

Increasing Market Share and Staying Relevant.

On top of the advertising angle, Google is also being driven to produce Stadia by the risk that YouTube and Chrome will be superceded by a competitor.

YouTube is arguably the first port-of-call in the west for online video consumption. However this does not mean it is infallible. The quick rise of streaming sites such as Twitch, TikTok, Netflix etc, demonstrate the potential for a competitor to enter the space and take market share.

However, by integrating video gaming itself – with its array of 2bn gamers worldwide – into YouTube keeps the platform relevant, innovative, and interesting for its users. If they integrate successfully it is plausible that people will migrate from Twitch and Mixer (or should we say, Facebook Gaming) to YouTube for a more immersive and engaging experience.

Our conclusion?

Stadia is like an electric vehicle. It is a well crafted vision of the future, but still just not quite there yet.

The main issue is infrastructure. People don’t want to sit for 1 hr while their car charges, likewise, gamers don’t want to play compressed games on poor unreliable internet connections. However the infrastructure will come in time, and we believe that if Google is to continue investing into Stadia it is likely that we are going to see a shift into advertisements. This is what Google’s ecosystem is culturally and financial honed to do.

Once management are comfortable that it achieves this objective, beyond just a brand exercise promoting their product suite and demonstrating their ability to solve tricky technical issues, they might be ready to mention Stadia in their annual accounts.