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Sony bought the cloud-based gaming company GaiKai and now it looks as though the industry might move to weak hardware and cloud-powered graphics.

The video game industry may have taken steps forward in graphics and gameplay, but the video game model has been mostly the same since the inception of Pong. Buy a console, buy controllers, buy a television, and buy games. Recently however, gaming has begun to shift from physical CDs and cartridges that you have to go to a store to buy, to digital downloads from distribution systems (like Steam, in our recent case study) straight to your console. And of course, all of this has come straight from the cloud.

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Current predictions peg the next generation of consoles as being released in late 2013. Rumors about the Playstation 4 and the Xbox 720 have been circulating for some time, in addition to rumors about how the cloud will change the face of gaming. Already, we’ve seen services like Origin from the game publisher Electronic Arts try and break into the niche that Steam from Valve has had the corner on for years. The Xbox Arcade, Playstation Network, and Wii Ware system have all tried to deliver games to consoles through the cloud so consumers don’t have to wait by the mailbox or drive to the store to get games at a marked up price.

Most recently in the industry, Sony bought the cloud gaming company GaiKai for $380 million USD. Despite the focus on gaming from the cloud, impressive hardware specs are still the top priority around the industry. Installing high-performance CPUs and GPUs at a low cost to gamers is always going to be the top order of business for the next console that will be hitting shelves. But some critics are saying big companies like Microsoft and Nintendo should be worried less about hardware and more about delivering a cheap solution to simply accessing a library of games in the cloud.

Sony might be thinking along those lines exactly. GaiKai was a cloud-based company that let people access over forty popular video games online, without needing any specialized or impressive client-side hardware. Some reports have speculated that Sony will try to use this service to extend games and gameplay to other devices besides the Vita or Playstation, but to mobile phones, tablets, and kiosks as well.

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Traditionally, game consoles makers have sold their wares at a loss, to make money through game sales. They make console hardware as impressive as possible to run the most impressive games and to make sales that way. Making consoles with brand new hardware means the manufacturers are losing money on the assembly line to keep consoles as the cheaper alternative to impressive PC gaming rigs. With the cloud, all of that might change.

With the cloud, companies wouldn’t need to operate at a loss in manufacturing systems, they would just have to spit out the bare minimum for systems to run an interface to get to the cloud and use processing power in the cloud to deliver a powerful gaming experience to gamers home TVs. GaiKai wasn’t even in a league of its own. OnLive is a company that offers the same service but to PCs, mobile devices, and its own streaming box which sells for just under $100 USD. In the near future, OnLive hopes to add support to smart TVs and other devices.

The downside that might be the ultimate pitfall for cloud gaming is that hardware sales in the short term would take a huge hit, which is something big companies like Microsoft might be unwilling to do. But, the flipside is what we discussed earlier, that very few console makers get a profit in their first year of sales. The more overarching problem may be that the infrastructure isn’t in place yet to support cloud-based gaming. Consumer networks and massive networks from gaming companies would have to be redundant and secure and unsinkable, a feat which hasn’t been achieved yet as Xbox Live went down this weekend and all the problems we heard about PSN last year with hackers and downtime.

Who knows what the future will hold for gaming. Undoubtedly the cloud is infiltrating, but to what extent and how quickly may be anyone’s guess, and Sony may just be the front runner this go around. To learn more about the cloud, check out our blog post about how the cloud is a greener technology compared to what most companies are using today.