The Future of Game Distribution

Thanks to increasingly cheap and fast internal storage and internet, the future is almost certainly digital, but is it digital downloads, or cloud gaming?

Game is stored on local storage

Able to modify game files

Unrestricted access to downloaded games

Games do not have to be downloaded

Immediate access to purchased games

No expensive gaming hardware required

Games need to be downloaded and updated, which can take a lot of time and storage space

You can only access a game you've paid for by downloading it

Downloaded games often need to connect to authentication servers before allowing you to play them

You only play games you've paid for by streaming them

There is additional latency between inputs and the video

High bandwidth internet is required

You have to pay a subscription for use of the service, as well as buying the games

Internal storage is getting cheaper and faster, so it's easier to have a lot of downloaded games

Average internet speeds are increasing, so it will take less time to download games

Can target people who are interested in games, but don't want to invest in expensive gaming hardware to try them

There are a growing number of competing storefronts, which could lead to the same problem video streaming services are having

Digital download storefronts don't work on a subscription model, however, and there is a lot of overlap in available games, so this isn't a serious issue unless things continue in that direction.

DRM can deny the customer the ability to modify game files and deny access to the game

Games could be patched to disable DRM if the authentication service is shut down

The cloud gaming service is entering an already highly competitve market with digital download storefronts

Nvidia has made deals with major digital storefronts to allow customers access to games on their Geforce Now cloud gaming service based on their ownership of games through those storefronts.

Hardware becoming cheaper and internet becoming faster may counter the benefits of cloud gaming

This is a non-issue for the forseeable future, as new games continue to be larger, and demand more powerful hardware

Game files cannot be easily modified

This isn't a problem that can be easily solved for cloud gaming services, and it's impossible to grant the freedom a customer would have with local files without introducing security risks or removing many of the benefits of cloud gaming

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Digital downloads don't seem to be going away any time soon, and it's almost certain it won't go away for good. At least with the current implementation, modding is simply not possible for cloud gaming, and it's inherently impossible for any games someone has acquired through a cloud gaming service to be played offline. Additionally, with most big releases requiring installation and downloading updates anyway, physical media is unlikely to make a return without a drastic change in the way games are made and consumed. However, the technology for cloud gaming does seem to be at a point now where it can provide a good experience, and this will only improve over the coming years. Of the current cloud gaming services announced and available, Geforce Now seems the most promising, followed by Playstation Now. Both of these services are made by companies that have been in the game industry for many years, and they're backed by existing stores, solving the competition problem. Geforce Now has you pay just to be able to use their servers for games you already own on stores like Steam, which has the disadvantage of mostly targeting people who already play games. Playstation Now, on the other hand, provides access to all games on their service for the subscription. Upcoming Amazon Luna has a similar model, with a cross between cable packages. Google Stadia, finally, seems to be the biggest failure. Not only do they charge a subscription, you then have to buy the games on their own storefront to gain access to them (though a small selection are included in the subscription), and this is a large part of why this was a failure, and something other cloud gaming services should learn from.
Ultimately, there are already good services in cloud gaming out there, it's just a matter of attracting customers to them, as a large number of potential customers are already capable of playing the games they offer, without the latency, as they have the hardware already. I expect this to change within the next 10 years, however, when these services are more well-known and people consider whether to buy the new hardware that will inevitably be released in order to keep playing new games, or switch to the service - as well as people joining the hobby thanks to the low barrier to entry these services offer.