As Sony reveals the PS5 Pro, Xbox is quietly building a cloud gaming dominance that could see it lead a $40 billion industry in just ten years

What you need to know

• Bloomberg Intelligence is a firm that that delivers analysis on a variety of industries to help investors.
• A recent report from the firm shared to us describes how the cloud gaming market (that Bloomberg describes as cloud streaming gaming or CSG) could expand to become a $40 billion industry in the next ten years.
• Bloomberg cites markets like India leading the way. Coupled with the roll out of more powerful internet options, traditional console gaming plays second fiddle to mobile play in the region.
• Bloomberg analysists describe how Xbox is poised to lead the way in the segment, but warn against strong competition from PlayStation and NVIDIA.

Today, Sony revealed its $699.99 PS5 Pro , while Microsoft focuses on making Xbox more affordable than ever.

A recent report from Bloomberg Intelligence shared with us by the firm details how Xbox and Microsoft could be at the forefront of a major cloud gaming boom over the next decade. One of Microsoft's most prolific innovations with Xbox in recent years is its Xbox Cloud Gaming service, which as of right now, is tied to Xbox Game Pass Ultimate. In essence, cloud gaming allows users to avoid paying the upfront cost of a console, which can run into hundreds of dollars, and instead pay a subscription to use one of Microsoft's servers to deliver the game to their local device.

The limitations of the tech at numerous, though. Light can only travel so fast, and even with the best fibre optic conditions, the end user's physical distance to a data center can introduce latency or pixelated visuals. Furthermore, Xbox Game Pass Ultimate is also quite expensive at $19.99, particularly if you have no plans to use its additional features. You're also limited to games within the Xbox Game Pass library , which contains roughly 300~ games on a revolving basis. However, Microsoft is on the cusp of fixing some of these limitations — more on that shortly.

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Microsoft is always expanding its data center footprint to accommodate its users, and is currently constructing a server farm in Hyderbad, India, which is of particular interest to today's topic.

Bloomberg Intelligence is a firm that provides analysis on a variety of industry topics to help investors make better decisions. Recently, the company shared a report with us detailing how it thinks cloud gaming is set to expand ten fold over the next decade, growing into a $40 billion industry globally.

"Cloud-streamed gaming (CSG) services took in $3.5 billion of revenue last year, a sliver of the $184 billion generated by video-game makers globally, yet we think the share will increase rapidly as streaming lets gamemakers reach a bigger addressable market that includes mobile devices, not just consoles and PCs. This will be crucial for emerging markets, where people rely more on mobile devices and less on expensive, fixed hardware."

The full report details how it will be India, rather than the United States, that leads growth in this segment. India is a nation dominated by more flexible mobile gaming, instead of more traditional console gaming. The upfront cost of a video game console is simply well beyond the current purchasing power of some regions, which has led to the near-total domination of mobile gaming to fill the gap. Bloomberg emphasizes that the roll out of improved network infrastructure in countries like India over the next decade could lead to a cloud gaming boom, owing to the pending availability of global heavy hitters like Call of Duty appearing on cloud gaming services.

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Bloomberg specifically cites AI technologies as supporting cloud gaming aspirations too, owing to the ability to potentially artificially generate frames on the local device to offset latency issues. Frame generation is widely expected to be ready to play a major role in the next console generation, and it's undoubtedly going to have some role to play in mobile gaming as well. Microsoft has also been on the cutting edge in this sector, committing to Snapdragon processors for its Copilot+ PC range, which come with local NPU cores for generative AI without necessarily needing to fully leverage the cloud for video encoding. Future phones, consoles, and maybe even TVs will eventually have neural processing as standard, too, potentially enhancing the usability of cloud gaming beyond its current technical limitations.

Bloomberg expects that Microsoft (with Xbox) and Sony (with PlayStation) will "dominate" the cloud gaming market to the tune of 40% and 15% respectively, owing to both firm's massive content back catalogs and their head start in the sector.

Pain points

There are a variety of pain points Microsoft and its fellow cloud gaming providers will need to overcome in this report, though. For example, Bloomberg cites the fact Apple has "opened up" its app store to cloud gaming as of January 2024, but the reality is far from the case. Xbox was in court just last week complaining to regulators about Apple. Apple's "opening up" of its store amounts to what is essentially a lie, with its fees and rules about in-app purchasing making the business unviable. Google Play has been marginally better, but the regulations and policies of both Google's Android and Apple's iOS has led Microsoft to double down on developing its Xbox Cloud Gaming web version instead, which exclusively features Fortnite , as Epic Games also sought to avoid Apple's history of regulator-mocking anti-competitive behavior . Cynically, I'm not sure Microsoft can rely on Apple to grow its business, but perhaps Bloomberg has more reasons to be optimistic here.

Bloomberg also projected that Microsoft will introduce ad-based tiers in 2025 for Xbox Cloud Gaming to improve access to the service for lower-income customers. However, as of right now, our sources suggest that Microsoft isn't planning on introducing ad-based tiers for Xbox Cloud Gaming any time soon, despite some exploration into the possibility. Plans could change, though, and it's undoubtedly a good idea. We did confirm that Microsoft will introduce a separate Xbox Cloud Gaming tier in the future to potentially bring down costs instead, splitting it off from the more expensive Xbox Game Pass Ultimate. Xbox Game Pass Ultimate includes PC Game Pass and Xbox Game Pass, which cloud-only users wouldn't necessarily want or need. Microsoft is also planning to let users buy games to own via Xbox Cloud Gaming as well , possibly as early as this winter.

The report also presumes that Microsoft will place games like Call of Duty and Diablo on its cloud service, but that might not be the case for anywhere up to fifteen years. The UK competition regulator (CMA) forced Microsoft to give up the cloud gaming rights for all Activision-Blizzard titles, handing Ubisoft exclusivity to license all cloud gaming versions of these titles on a global basis. As of writing, it's NVIDIA GeForce Now that has benefitted from offering cloud versions of these titles, rather than Xbox. There's no evidence to suggest Ubisoft plans to provide access to these titles for Xbox Cloud Gaming users. However, given the recent jitters over XDefiant and Star Wars Outlaws' performance coupled with the cratering of its share price , Ubisoft may be more willing to make a deal than they were previously. Plans here could definitely change quickly, given the circumstances.

Massive potential, massive uncertainty

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The report's author and Bloomberg analyst and researcher Nathan Naidu emphasized Xbox's "grip" over the sector, but warned that Sony remains a huge potential competitor despite Microsoft's technological advantage.

"Xbox has a solid grip on the cloud streamed gaming (CSG) market thanks to its lead over major rivals in games library and cloud technology, with a greater emphasis on cloud technology in the earlier half of Bloomberg Intelligence’s forecast period as that sets its apart from Sony and other key competitors in the CSG market," Nathan continued. "[Xbox's] strength in cloud technology underpins better-than-peer user experience and subsequently successes in its user acquisition. Sony’s [PlayStation Now] still has the largest game catalog, which includes first party games that are at the same calibre to those offered by Xbox, and we think that is Sony’s strongest defence against its arch-rival. We expect Sony’s cloud gaming strategies going forward to be more reactive in nature as it anticipates other actions that Microsoft’s Xbox unit may take, particularly around platform exclusivity of key games franchises."

Microsoft's gaming business is in a bit of a weird place right now. I wrote a while ago about how Xbox is undergoing some growing pains , and its vast size and vast purchase of Activision-Blizzard has similarly increased its need for vast cash flow. To that end, Microsoft has begun doing the unthinkable — putting Xbox exclusives onto PlayStation , with no sign of stopping.

It's a capitulation in essence, that Microsoft admits it has lost the console war so Sony's dominating PlayStation platform, which has outsold Xbox 3:1, or even higher, according to some analyses. Microsoft insists it has "more Xbox console users than ever," and it now has an addressable audience of half a billion users, owing to mobile titans like Candy Crush Saga, and the juggernaut that is Call of Duty. To find growth in a stagnant console market, Microsoft has spread its tendrils out across to mobile gaming and PC gaming, where it faces a variety of other challenges, from Steam's dominance on PC to Apple's anti-competitive policy behavior .

Microsoft's diversity has always been its strength. However, its tendency to pivot into new industries has often come at the detriment of others, as its attention wavers. Microsoft's Xbox console platform still servers tens of millions of users, but various issues from major publisher games skipping the platform to independent Xbox devs having to reach out publicly on social media to get client support speak to an Xbox that has utterly divided attention , and may be spreading itself far too thin in the process.

If the cloud gaming market well and truly is poised to grow ten fold in ten years as Bloomberg projects, Microsoft certainly can't afford to take its eye off the ball.