sony-cloud-might-upset-some-gamers-but

One of the more intriguing pre-E3 rumours has been that one about Sony forming a Cloud partnership with, well, someone. Personally, I’m rather hoping it is OnLive so I can say “I called it,” but pettiness aside, this is possibly the best thing to happen to Sony in a long time.

It’s also a move that, depending how deep the potential partnership is, could prove to be very alienating. Cloud computing is still very much in the early adopter phase as far as consumers go (though it’s widely accepted in business, it must be said). Specifically talking to the gaming space, there is a great deal of mistrust around DRM and the behaviour of publishers with digital goods. There’s plenty of gamers that lack fast enough connections to effectively run a Cloud service that deals in the kind of data intensity that gaming does.

I don’t think Sony would be brave enough to turn away from those gamers and demand people sign on to this rumoured Cloud service. That said, even if Sony did do that I would argue that it is perhaps the smartest business move the struggling giant has made in a long time.

Games are becoming a very commoditised product; there is very, very little to separate one game from another. Yes different developers make the games, and yes there’s marginal difference between the genres, but there are more big budget games with robust multiplayer modes than ever before.

Now, what happens when a product becomes commoditised is that the people that make it and then distribute it don’t make much money from it. Discounting becomes aggressive and margin becomes very thin. Any industry that starts producing more, but getting less from it, is not a sustainable business model.

The smarter businesses then start to look to other ways to add value to the product, and increase their own margins. So what happens then is those businesses start to find ways to increase customer loyalty, and get them to spend more with the company. Cloud services are an example of this value-adding. You see it with the music and film industries already. Services like Spotify, Netflix and Sony’s own Music Unlimited are beautiful examples of Cloud’s value to the producers. Rather than relying on big spikes of income (new albums/ film releases), the publishers instead earn an annuity income stream – a reliable income that is far more desirable from an accounting point of view.

Cloud audiences also tend to be captive. Once you’ve got someone using the service, it’s a pain to switch services, and the longer a customer uses a service, the more they lose from switching it off or changing providers.

Consumers benefit because they get better service – access to 15 million songs rather than 10 songs on an album – but the reality is that the value of an individual song sitting on a server is nothing to a big corporation, so the profit margin for delivering it over the Cloud is far more financially attractive than producing those CDs.

What does all this have to do with Sony and the PlayStation? In terms of both hardware and software, margin is the great problem Sony is facing right now. Revenue is not what is hurting Sony, the problem is that raw sales numbers might be good, but the loss in margin when big TVs went from $2000 to $500 is not, and when game development budgets went up, but RRP didn’t, software no longer supported hardware like it used to.

By moving to a Cloud model, Sony might indeed lose some revenue from dissatisfied or angry customers, but the quality of the customers left, from a profitability point of view, would be far better. With all the rationalising down that Sony has been doing, a complete move to Cloud services may well be all the company needs to move to a more nimble and profitable future.

And the usual applies – a healthily profitable company is a company that can give back to fans.