BRIAN KENNY: If you’re looking for your teenager, chances are you’ll find them staring at a screen enmeshed in a video game because they, along with 85% of their peers are hopelessly devoted to gaming. According to a recent survey by Digital Wellness, teens and tweens spend as much as two to three hours a day on video games and apps. With popularity fueled by the COVID lockdowns, gaming is second only to social media in terms of screen time. And if the rapid growth of professional e-sports leagues is any indication, gaming is about to get supercharged with a projected audience of 640 million in 2025 tuning into watch and gamble on their favorite gamers. In just a few years, e-sports has garnered half as many views as the typical NBA game. Gaming, it seems is a surefire win for any firm with the means to get in the game.
Today on Cold Call, we welcome Derek van Bever and Akshat Agrawal to discuss the case, Google Stadia: Game On or Game Over. I’m your host Brian Kenny, and you’re listening to Cold Call on the HBR podcast network. Derek van Bever is a senior lecturer at Harvard Business School who studies strategy and innovation among other things. He is a repeat customer here on Cold Call. Derek, welcome back.
DEREK VAN BEVER: Thank you very much, Brian and hi, Akshat.
BRIAN KENNY: It’s been a while since we’ve had you on the show. Akshat Agrawal is the co-author on this case and is a very recent graduate of Harvard Business School. He is currently working at Codium, an AI firm. Akshat, thanks for joining us.
AKSHAT AGRAWAL: Thanks for having me.
BRIAN KENNY: Great to have you on the show, and congratulations on your recent graduation. How’s the real world treating you?
AKSHAT AGRAWAL: I wish I could go back.
BRIAN KENNY: I think that’s probably a common refrain that we would hear from our graduates, but it’s great to have you on the call today. We love having the case authors together. This is a really interesting case and I think a lot of people will be able to relate to it simply because gaming is so popular. I am not a gamer. I’m going to put that out there right now. The closest I have come to being a gamer was probably playing Atari Tennis. Most of our listeners don’t know what that is. Derek, do you know what Atari tennis is?
DEREK VAN BEVER: I’ll do you one better. The game of choice when I was in my heyday was Pong, so Akshat gave me both a doctorate in the current gaming industry as well as sharing so much of his experience prior to HBS working on the Google Stadia team. So this was a real privilege for us to be able to learn from someone who had been inside.
BRIAN KENNY: Been inside. That’s awesome.
DEREK VAN BEVER: Exactly how it had worked and the decisions that were made along the way.
BRIAN KENNY: So let’s just jump right in. Derek, I’m going to ask you to start by telling us what the central issue is in the case and what your cold call is when you start the discussion in class.
DEREK VAN BEVER: Yes. So many of your listeners who are alumni will remember the course “building and sustaining a successful enterprise,” the Clay Christensen course, BSSE in our shorthand. This case, which Akshat first came to me mid-semester and said, “Boy, do I have a good idea for a case.” This case deals with one of the central issues in our course, which is the issue of corporate capabilities. This goes all the way back to work that Joe Bower had done here at the school and addresses the question, how is it that companies can be capable of some things and incapable of others? We’re accustomed to thinking about people on our team and saying, “Oh, can she do that? Can she not do that? Is somebody ready for this position?”
The same thing applies to companies and the shorthand that we use is we talk about RPPs: resources, processes, and priorities. So the question here, a company like Google with 45 billion dollars of R&D spent annually, how could Google be incapable of anything? And that’s really where we’re off to the races. So as we’re dealing with this area of cloud gaming, my cold call to start the class is simply, is Stadia a good idea or a bad idea? Not for Google, but just in general, which gives the gamers in the room a chance to talk about what’s important to them in their gaming lives. And then we follow that up with, ah, okay, so whether or not you think cloud gaming is a good idea, is it a good idea or a bad idea for Google? And then we’re off to the races.
BRIAN KENNY: Okay. Great. Akshat, I usually ask case authors where they got the inspiration to write a particular case. Apparently you lived it. So that’s where part of that inspiration comes from. For our listeners who aren’t that familiar with gaming, can you maybe lay out the landscape for us a little bit? Where does gaming fit in the media landscape and where does Stadia fit in the gaming landscape?
AKSHAT AGRAWAL: Absolutely. So I was shocked to learn this the first time I saw this stat, but amongst the entire entertainment and media industry, gaming is actually the largest sector by far. I think it was on track to do or it did more than 180 billion in revenue in 2020 alone and that’s grown rapidly throughout the pandemic and beyond. So this is a big industry. People really like games, and I think it’s the preferred form of entertainment for many, many people. The big players in the space are people you’ve likely heard of. The Sonys of the worlds with the PlayStation, Microsoft with the Xbox, Nintendo, but Google and Apple have also been in the space via mobile gaming, which is a huge revolution that happened over the last decade and now makes up a significant chunk of the market. I would say those are the big players on the platform side. Of course, we have to remember the actual artists and creators and game makers themselves. This is a very hits-driven business, so we see a lot of consolidation in the space. There’s a few big studios like Activision Blizzard, EA and the like. And interestingly, we’ve also seen a lot of M&A activity between platforms and the studios with Microsoft’s acquisition of Activision Blizzard. So those are probably the big players in the space, and it is a huge space for sure.
BRIAN KENNY: Yeah. Yeah. It sounds that way. Derek, maybe you can tell us a little bit more about Google Stadia and what their vision was when they entered the space. How were they hoping to disrupt, I guess?
DEREK VAN BEVER: Sure. Well, when you think about all the other aspects of our lives that have gone fully digital, so whether it’s Netflix or Spotify, the idea, the vision that you could actually play games without having to buy an expensive console and without being tethered into your living room was just a hugely compelling vision. So they said, “Gee, what if we could eliminate the need entirely to buy gaming consoles and expensive hardware? And what if in fact we could put the latency of the network so close to individual users’ homes that we could pull off this very difficult technological challenge in a way that was just as seamless as if somebody had an Xbox at home or if somebody was just a longtime gamer accustomed to their prized console?” And so in some ways it seems like just a logical vision of the future that cloud gaming would be the next phase in gaming. Akshat, you had talked about how gamers think about their consoles and how cloud gaming fits in a gamer’s life. Can you talk a little bit about that?
AKSHAT AGRAWAL: Gamers really care about performance. How snappy does the gameplay feel? They’re willing to invest a lot in these consoles, which take up a lot of space in your living room and they have a lot of allegiance to these things. And a lot of them care about, Hey, I want to get the best picture quality, the best frame rate, or how quickly, how crisp the image is. They invest a lot in these platforms when you think about it. Like you said earlier, Brian, teens and tweens are spending multiple hours a day investing in these games, unlocking achievements, so there’s a tangible sense of attachment. You don’t easily just switch between platforms. And so I think that’s an important part of the psyche here to understand.
BRIAN KENNY: Yeah. They can spend a fortune on their chair from what I understand, the accessories that go along with the setup. But you mentioned frame rate. Obviously the infrastructure is critically important to the experience of the gamer. What were some of the innovations that Stadia was able to come up with to start to chip away at that?
AKSHAT AGRAWAL: Absolutely. This is a great question and it gets to the heart of why Google is uniquely positioned to deliver on this technology. So when you think about it, we are able to stream movies and music, but still not really stream games. After Stadia, there hasn’t been a major cloud gaming attempt again. The difference between these two use cases is that music and movies are one-directional streams. The data is coming from a data center to your phone, you’re not sending anything back, and as a result, we have this concept of buffering. The thing can buffer on your device, and then you can just get a nice smooth listening or viewing experience. The difficulty with gaming is it’s not one-directional, it is two-directional because the data center will send you a picture; based on that picture, you’ll press a button and that button, that signal has to be sent back to the data center so it knows what’s the next picture it should show you. Except this has to happen hundreds of times per second in order for you to feel like it is a fluid experience. To feel like it’s comparable to what’s in your living room.
DEREK VAN BEVER: Akshat had to explain this to me so many times. To say a blink of an eye, a blink of an eye is way too slow when we’re talking about the performance that he and his team were building.
BRIAN KENNY: Does it get more complicated too, Akshat when you’ve got multiple players where you’ve got these multi-game experiences?
AKSHAT AGRAWAL: Absolutely. Right. Throughout all of this, latency is really the key factor. And so to your question, Brian, on what were the technological innovations that enabled this? I’d say there were a couple. One is Google has deep expertise in streaming in general, and this is because of YouTube. YouTube accounts for probably like 30% of the Internet’s bandwidth at any given time. So you know that Google has built up deep expertise in how do we handle this network traffic? How do we become really efficient at streaming? On top of that, when you think about how data centers are typically located, you’ll have a big data center that’s somewhere where land is cheap, power is nearby and accessible, and these tend not to be where people live. But if latency is your key constraint, you actually need the data center to be close to where people live because the one thing that you can’t overcome is the speed of light. And if you need this latency so low-
BRIAN KENNY: Even Google can’t overcome the speed of light, is that-
AKSHAT AGRAWAL: Believe it or not-
BRIAN KENNY: Is that what you’re saying?
AKSHAT AGRAWAL: Google cannot overcome the speed light that we know about.
DEREK VAN BEVER: Even Akshat has not overcome it yet, but I’m hopeful.
AKSHAT AGRAWAL: So one thing that Google did, which is very unique, is this concept of having a network on the edge. So instead of having one giant data center where all this traffic is served from, instead, there were a lot of smaller data centers located closer to where people actually lived, and that allowed us to overcome that fundamental latency constraint. So I’d say it’s the combination of these two things, which are both incredibly difficult technical challenges. They require you to have a large degree of infrastructure know-how already built out, and that is something that Google is one of a few companies that can deliver on that.
BRIAN KENNY: So you would think people would just be falling over themselves to get to this product. Lining up to sign up for it, Derek, but that wasn’t the case. The case goes on to talk about some of the challenges that they faced in trying to get people to jump on board. Can you describe some of those?
DEREK VAN BEVER: Yeah. So this goes to this issue of capabilities. Something that Akshat alluded to a moment ago was that the gaming business is a hits business. It’s a blockbuster business. And Google for all of its various and deep strengths is not fundamentally a publishing company. They’re not a studio. They don’t have expertise in this area, they don’t have experience here, they don’t have staff here. And so just trying to understand how do we have to change to be able to be a publisher of hits? That’s just a brand new question even for Google. Second, for reasons that we’ll go into some competitive, some status-oriented, they had a very confusing business model. So their thought was that they would have a subscription business model, but they also wanted their users to buy the games. So for example, I asked my son if he was at all interested in cloud gaming and he wasn’t super excited about it. And then when I explained that you had to not only have a subscription and buy each individual game, that was it for him. Third is, there are at least two critical segments in this user base. The serious gamers and then the casual gamers, they’re very different in their job to be done. Akshat, you really hit on this. Could you talk to us about segmentation in this industry?
AKSHAT AGRAWAL: Absolutely. We could segment the market really, really finely, but if we look at it from a high level view, there’s like professor said, two categories. There are your hardcore serious gamers who are spending multiple hours, who have a high willingness to spend. They probably make up the most amount of spend in the market, but they really care about things like the best performance because they’re willing to spend to get just that slightly higher framework rate, that slightly crisper picture. On the other hand, there are your casual gamers. They will spend more time doing mobile gaming, which is less sophisticated, less performant overall, they might not the same amount of time. And mobile gaming is really what unlocked this segment over the last decade. They’re a big segment, don’t get me wrong.
BRIAN KENNY: So is that like Candy Crush? Would you put them in that category?
AKSHAT AGRAWAL: Candy Crush is a great example. You have people who are really spending a lot of time playing that, but their preferences are different.
BRIAN KENNY: I play Candy Crush, just so you know, I’m cool.
DEREK VAN BEVER: I caught that. That’s good.
BRIAN KENNY: I guess it’s also important to note that while Stadia is doing all of this, Microsoft and PlayStation are not sitting back and doing nothing. The case talks about the next generation gaming consoles that they were going to bring into the market. Can you talk about how that might’ve changed the equation here as well? Akshat?
AKSHAT AGRAWAL: The way that Stadia initially positioned itself was competing with the Xboxes and the PlayStations for that premium hardcore gamer segment. And this was through a lot of different stuff that we put out. For example, at one point the messaging was Stadia is the most powerful place to play. What if we could bring the power of the data center into your living room with the highest frame rates at the best resolutions, 4K at 60 FPS, which was at that time better than anything that Xbox or PlayStation could put out. We’re going after their most prized customers that drive the most amount of spend. And so the competitive response was expected, which was they one-upped us. They came out with the PS five and the next version of Xbox, which had even better specs.
And so if you’re now catering to a market, a segment that really only cares about where can I get the best performance and the best experience, we’re now getting into a sustaining competition against those incumbents on who can provide the best experience. And for cloud gaming in general, you are on the back foot because the latency for something that sits in your living room is going to be a lot less than the latency of something that sits in a data center, even if that data center is only a few miles away. So we’re at a fundamental disadvantage if we’re talking about competing on the axis of performance.
And what about competing on the axis of game titles because the case gets into that too. Maybe Derek, you can explain to us what the AAA title carries with it.
DEREK VAN BEVER: Yeah. So I was thinking about something that you were just talking about. If you’re Google and you’re thinking about entering the gaming business and you say, “Who is our competitive set? Is it these myriad casual gaming studios that come out with these tiny little one-hit-wonder momentary hits or are we peers with Microsoft and Sony? Are we peers with the Xboxes of the world?” And of course, your almost instant temptation is, of course, that’s our reference set. And so as Akshat said, we enter in sustaining competition and AAA game studios, those are their bread and butter, but the
