– How does cloud gaming work, and how is it profitable?

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I know the very basics. Cloud gaming uses the equipment of a provider to run the game, and it is streamed to the customer. This is where my knowledge ends and confusion begins. Let’s say you are playing an Xbox game. If you use Microsoft’s Xbox, those aren’t cheap. And you are only paying a small monthly fee, so how is it profitable? Wouldn’t you have to play for years to cover the cost of the equipment that is actually running the game?

In: 2

Theres many things at play here, but the main ones are:

1. Buying anything in bulk is much cheaper than buying a single one. If a gaming PC costs $500 then buying them in bulk only costs $360

2. You dont need to buy a machine for everyone, just enough to cover peak hours. This means you can sell 200 gaming PCs to around 600 people as long they dont all play at the same time. This way paying $360 per PC means it only costs $120 per person

3. Finally you price it in such a way that you break even every year, if you charge someone $10 a month to use a $500 machine it seems unprofitable, but it has paid for itself after 1 year and will now produce 100% profit every year.

Well apart from the points /u/kanadran covered you already answered your own question

>Wouldn’t you have to play for years to cover the cost of the equipment that is actually running the game?

That’s the plan. The long term goal for streaming services is that the customers don’t own gaming machines but are subscribed to their service all the time. They don’t expect people to subscribe for two months and then drop it.

Console games are subsidized by licensing games; Sony and Microsoft sell consoles at release for a loss and make up the money through game license deals and accessories and the computer hardware is used maybe 10% of the time if you pay 2 hours a day. With a cloud streaming service there is less wasted hardware time since it’s being utilized at a much higher rate. Game streaming companies are essentially paying the upfront costs for the hardware and selling it to use so it can be utilized at a much higher rate.