Sony's PlayStation 5 Sounds Like A Big Bet Against Cloud Gaming

The first details for Sony's (NYSE:SNE) PlayStation 5 were recently revealed in a Wired interview with Mark Cerny, the console's lead system architect. The upcoming console will support 8K graphics, ray tracing for real-time cinematic lighting, 3D audio, and backwards compatibility with PS4 games. It will also sport a custom SSD (solid-state drive) for faster load times.

Unlike the PS4, which used a single AMD (NASDAQ:AMD) APU that merged the CPU and GPU onto a single die, the PS5 will be powered by two separate AMD chips -- an eight-core Ryzen CPU and a custom Radeon Navi GPU. Cerny didn't disclose the console's release date, but DigiTimes suggested that it would arrive in the second half of 2020.

The PS5's specs weren't surprising, since every new iteration of the PlayStation featured big technological upgrades over its predecessors. However, the PS5's specs also counter the notion that dedicated gaming consoles will die out with the rise of cloud gaming services.

Contradicting earlier predictions

Sony launched PS Now, a cloud gaming platform that streams over 750 PS2, PS3, and PS4 games to PS4s and Windows PCs, five years ago. The service costs $20 per month, $45 per three months, or $100 per year.

The arrival of PS Now -- along with other cloud gaming services like NVIDIA's GeForce Now, Alphabet's Google Stadia, and Microsoft's (NASDAQ:MSFT) Project xCloud -- indicated that the days of dedicated gaming consoles like the PS4 and Xbox One were numbered.

After all, if games could be streamed like on-demand videos, they could be played across a wide variety of devices (like smartphones, tablets, and set-top boxes) instead of being restricted to high-end PCs or dedicated gaming consoles. Therefore it would make sense for Sony and Microsoft to release cheaper devices, like set-top boxes, to stream cloud-based games.

Recent rumors suggest that Microsoft could launch two Xboxes in 2020 -- a full-powered successor to the Xbox One, and a cheaper Xbox that only plays cloud-based games. Hajime Tabata, the director of Final Fantasy XV, also predicted that the next Xbox and PS5 would be cloud-based consoles in an Xbox Magazine interview last year.

However, the PS5's specs indicate that Sony isn't ready to produce a fully cloud-based console yet. The console will likely offer PS Now as an optional service, but it will probably focus on delivering high-end graphics and audio on locally installed games.

Focusing on one niche market over another

Sony hasn't ever revealed its number of PS Now subscribers, but SuperData claims that the service generated $143 million in revenue in the third quarter of 2018. However, that would only account for about 2% of Sony's game and network service revenues during the quarter.

It also suggests that PS Now only has about a million subscribers, compared to the PS4's installed base of 95 million consoles. The adoption rate for the PS Now likely remains low due to the service's high price, high bandwidth requirements, and a lack of support for resolutions beyond 720p.

Meanwhile, the PlayStation VR, which launched in late 2016, is faring much better. Last month, Sony disclosed that it had shipped 4.2 million PSVRs worldwide. That still only represents a niche group of its total PS4 gamers, but it's growing at a faster rate than PS Now.

VR gaming and cloud gaming aren't really compatible, since VR games require high resolution displays, high frame rates, and low latency to reduce motion sickness. Streaming VR games directly from the cloud at a playable quality would require much higher bandwidth connections than traditional games.

Sony already refreshed the PS4 with the PS4 Pro in 2016, which offered 4K gaming and smoother performance for the PSVR. Therefore, it makes sense for Sony to upgrade its hardware again to offer an even better VR experience, which could widen its moat against Microsoft and Nintendo.

The road ahead

Sony is sticking with what works -- high-end local games and VR -- instead of releasing a cheaper console that only plays cloud games. Sony might eventually launch a cheaper cloud-based console like Microsoft's rumored "Scarlett Cloud" Xbox, but it probably won't jeopardize the future of its strongest business by going all-in on the cloud.

Meanwhile, Google is rushing full steam ahead by launching Stadia later this year. If Stadia sparks a paradigm shift in the gaming industry, Sony's PS5 could face an uncertain future as demand for powerful local hardware declines. However, there could still be enough room in the market for both traditional gaming consoles and cloud-based game services to thrive.

This article originally appeared in The Motley Fool.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Leo Sun has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Microsoft, and NVIDIA. The Motley Fool recommends Nintendo. The Motley Fool has a disclosure policy.