Microsoft spent almost two hours laying out the future of Xbox games, consoles, and services during its E3 press event yesterday. There were 60 games shown, a redesigned Elite 2 controller, and even a new Project Scarlett console, but Microsoft spent less than two minutes talking about its xCloud game streaming service. After promising to “go big” at E3 in response to Stadia, many had expected the company to fully detail xCloud, especially as Google is launching its game streaming service in November. Instead, Microsoft remained suspiciously silent, while dropping some big hints that the company is rethinking its cloud streaming service.

Microsoft first unveiled Project xCloud back in October 2018, promising to stream games to consoles, PCs, and even mobile devices with public trials in 2019. Microsoft has built custom hardware for xCloud in its data centers, combining four Xbox One S consoles into single server blades. This all means that it’s easy for developers to bring their games to xCloud because it’s the same Xbox hardware they already build games for.

Microsoft’s plans all looked logical until Google unveiled its Stadia cloud streaming service earlier this year. Google is partnering with AMD to build a custom GPU for its data centers, and it’s promising a lot of power and capability. Google claims Stadia will deliver 10.7 teraflops of power, which is more than the 4.2 teraflops of the PS4 Pro and the 6 teraflops of power on the Xbox One X. Microsoft’s Xbox One S console, the foundation of xCloud, has just 1.4 teraflops of power.

If Microsoft sticks with its Xbox One S hardware for xCloud, then it won’t be able to immediately compete with Stadia’s promise of 4K gaming at 60 fps. There are still far too many games that only run on an Xbox One S at 30 fps, and the console won’t even support most AAA games at native 4K.

xCloud hardware is already changing

It looks like things are about to change for xCloud, though. Phil Spencer, head of Microsoft’s Xbox and gaming efforts, revealed that the company is looking at its new Project Scarlett console and specs as “the formation of our future in cloud,” during the company’s E3 keynote. Specifically, Spencer said this:

When we talk about freedom to play, when we talk about Xbox in the cloud, when we talk about streaming your games, Project Scarlett and all of its power and all of its performance is the foundation of our future in console and the formation of our future in cloud.

Google has provided far more details about its game streaming service than Microsoft

While Microsoft had sought to get ahead of Google’s Stadia game announcements by promising the capability to stream up to 3,500 different games on xCloud, it didn’t follow up and deliver specific games or details like Google did last week. Instead of detailing xCloud specs, launch dates, or pricing, Microsoft muddied the waters by introducing a new “Console Streaming” feature. It turns an Xbox One into a streaming server so you can access your games wherever you are, very much like Sony’s Remote Play feature for PS4. A preview of this feature will be available in October, and Microsoft appears to be bundling Console Streaming under the broader Project xCloud service.

“It turns your Xbox One into your own personal and free xCloud server,” said Spencer. “Whether you’re using a console in our data center or your console at home, this October, you’ll be able to use our hybrid gaming cloud to play your games wherever you go.”

This idea of a hybrid gaming cloud is something Microsoft hasn’t mentioned about xCloud before, and it’s a mixed approach from the dedicated server blades that the company has been architecting. This approach could allow Microsoft to deliver on its promise of 2019 xCloud trials while working to upgrade its data centers to match Stadia.

It will be important for Microsoft, Sony, and others to match Google’s Stadia service and ensure game developers have the best server hardware to host their titles. Google’s Stadia announcement appears to have unnerved the industry’s big players. After months of talks, Microsoft and Sony are now collaborating on future cloud solutions for game streaming. Sony recently hinted that the future of PlayStation is the cloud, and Microsoft is making it clear that Project Scarlett will now form part of its own cloud future.

Exclusive games will be a key part of xCloud

Microsoft’s lack of xCloud details makes it clear that the company is taking a very careful approach at how it transitions games and its platform to the cloud. Game streaming still has massive hurdles to overcome, both in latency and bandwidth requirements, and Microsoft, Sony, and Google can’t fix those alone. Stadia’s 4K streaming will use up 1TB of data in around 65 hours, which would blow past most data caps that exist today. We’ll need better internet connectivity across the US, fewer data caps, and data centers that are closer to players to really see the benefits of cloud streaming.

Instead, Microsoft is focusing heavily on games and subscription services. Xbox Game Pass Ultimate now combines Xbox Game Pass for consoles and PC with Xbox Live Gold access all for $14.99 per month. If Microsoft can transition this service over to xCloud eventually then it will be a step ahead of Google’s approach that is more like renting a console in the cloud and buying the games on top. Google will have some titles bundled, but the vast majority of launch games will have to be purchased separately.

Microsoft has acquired Psychonauts developer Double Fine to help with the effort of getting content for xCloud and Xbox Game Pass. Double Fine will join Xbox Game Studios, and it follows a big push from Microsoft to acquire game studios. Microsoft has now acquired at least eight game studios in the past year:

The Initiative

Undead Labs

Playground Games

Ninja Theory

Compulsion Games

inXile Entertainment

Obsidian Entertainment

Double Fine

These studio acquisitions will be key to the future of xCloud and Microsoft’s broader Project Scarlett efforts. If Microsoft truly wants to create a “Netflix for video games,” then these new Xbox Game Studios members will have to create exclusive games that really convince people to subscribe to Xbox Game Pass. Google also knows how important games will be to Stadia, and it has formed its own studio for Stadia-exclusives. Microsoft has already promised that all of its Xbox Game Studios games will come to Xbox Game Pass at launch, and that means Gears 5, Halo Infinite, and the next Forza game will all be part of Microsoft’s subscription.

The cloud gaming war has been brewing for months, but with Stadia launching in November and Microsoft promising a Project Scarlett future for xCloud, it’s going to be an interesting year ahead for what the industry keeps telling us is the future of gaming.

Update, June 10th 2:30PM: Added Microsoft’s previous “go big” promise for E3.