How Sony could disrupt itself and its console rivals with its Gaikai acquisition

The disruptive effect of Sony’s $380 million acquisition of Gaikai could send reverberations throughout the video game industry.

As such, the deal will give Sony several strategic options that will help it fight the console war. With cloud gaming, the game isn’t processed on a user’s computer or TV. It is only displayed there. The processing takes place in a web-connected data center, or cloud. The game graphics and logic are computing on high-powered servers with good graphics technology. Then the visual result is streamed to a user’s PC over a broadband connection. The game can be played in 720p resolution (or for a higher cost at 1080p), which is similar to the experience that many users have with game consoles.

Sony could use this technology in multiple ways. For instance, it could use Gaikai to run older PlayStation 3 games on its upcoming PlayStation 4, without having to convert those games through a tortuous process known as porting, which would be effectively rewriting PS 3 games to run on a PS 3. That allows Sony to design the processor and graphics of the PlayStation 4 in any way it wants, without worrying about backward compatibility of the console. That in turn could reduce the costs of the PS 4 dramatically, allowing the company to sell its console for less money. That’s important because the PS 3 initial $600 price was an albatross around Sony’s neck during this console war.

Backward compatibility was a huge problem in the previous transition to a new hardware generation. Gaikai’s technology would head that problem off in the next console transition.

Sony can also employ Gaikai technology in the PlayStation 4 (expected in 2013) by using it to extend the life of the hardware. PS 4 games will look cool for a few years until computing technology advances and it starts to look obsolete. At that point, Sony would have to consider launching the PS 5. But with Gaikai, Sony would simply have to upgrade the hardware in the data center. Then it could play beefier games, improving the quality of games that the PS 4 could play, without changing the PS 4 hardware at all.

In the hands of Sony, Gaikai could get all sorts of games to run on the current PS 3. That would make the PS 3 a lot more attractive for developers, and that would put pressure on Nintendo and Microsoft, who currently don’t have cloud gaming technology.

By purchasing Gaikai, Sony also snatches a strategic asset away from rivals such as LG and Samsung. Both of those companies had previously announced deals to use Gaikai to enable cloud gaming on their television sets. Those TVs, combined with Google TV, had the potential to disrupt the game consoles because you could play high-end games on a TV without the need to buy a game console.

This purchase will likely make OnLive, Gaikai’s rival in cloud gaming, and the smaller Otoy into acquisition targets as well.

The interesting part about this deal is that it can disrupt rivals in multiple directions, and even itself. When you think about that, the $380 million price that Sony paid for Gaikai isn’t a huge one to pay.

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