Google’s has built its empire on ads, but analysts say it will have to find another way to make money for its new gaming service Stadia (GOOG, GOOGL)

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Google wowed the world when it unveiled its new game streaming service, Stadia, on Tuesday, but it failed to address how the service will make money.
Despite the lack of information around a monetization approach, one thing analysts that we spoke to agree on is that an ads-based model will not be enough to sustain Google’s ambitious gaming project.
Having to add an alternative revenue stream to ads may be difficult for Google, given its spotty track record with ‘for-pay’ services, but if successful, it could have massive ramifications for the company.

Google wowed the world when it unveiled its new game streaming service, Stadia, on Tuesday. But it left one important question unanswered. How much will it cost to play?

The answer is important not just for eager gamers, but for Google’s business as well.

Depending on how Google plays it, Stadia could take the internet giant’s business model to an entirely new level that it’s struggled to reach for years.

Right now, the speculation is that Google’s forthcoming game streaming service will make consumers pay to play. That would mark a big departure from the free, ad-supported business that Google has mastered over the years.

Patrick Moorhead, Principle Analyst at Moor Insights and Strategy, said that a pure ads-model would be an ideal revenue stream for Stadia, given Google’s spotty track record with subscription-based services, but that those chances are highly unlikely.

"In a perfect world for Google, it would be an ad-based model as the company isn’t that successful in ‘for-pay’ services," Moorhead said. But he thought it unlikely that Google’s ad expertise could be parlayed successfully into the gaming world, at least not in the near term.

"The reality is that it would take decades to get the gameplay and content optimized for that model," Moorhead said.

In an interview with Business Insider, Jack Buser, Stadia’s head of business development, declined to provide any details about how the service would be offered to consumers. "We’re not speaking yet about the business side of things," he said.

Is it iTunes, or is it Apple Music?

Google’s silence on the matter has left investors, competitors, and other industry insiders wondering how the company will make money on such an ambitious and expensive venture.

Google has built an $840 billion business empire on ads, while it has struggled to establish a winning subscription-based product. For instance, the company has tried launching a subscription competitor to Netflix and Amazon Prime with YouTube Premium, but last November, it walked back much of those efforts.

Google Stadia

Some observers think ads are such a fundamental part of Google’s DNA that the company lacks the commitment and mentality to create a successful for-pay consumer service. And if Google does opt to charge consumers directly to play games on Stadia, it will have to make some important decisions.

"Is it iTunes, or is it Apple Music," wondered Michael Pachter, Managing Director at Wedbush Securities. An iTunes model means Google would head down the traditional route of having users buy each game individually, while an Apple Music approach would turn Stadia into a monthly subscription service.

The difference between subscription and pay-per-play could prove consequential. Google envisions Stadia as proving a platform that any user with an internet connection and Chrome browser can hop into and start playing a game within seconds. For that reason, some think a "pay-per-download" model could create too much friction, preventing the kind of gameplay and experimentation Google wants.

Follow the Fortnite

Google also needs to worry about competition. Microsoft has announced it’s working on a game streaming service dubbed Project Xcloud, which could go live this year.

Some Wall Street analysts, like Wedbush’s Dan Ives, think Stadia will ultimately need to adopt a hybrid model that combines Google’s ad expertise with a subscription model.

"[Google has] a clear advantage on the ad front versus the likes of [Microsoft] which do not have that in their repertoire if they go down that path as well," Ives said. "[But] we believe a blended monetization strategy around steaming and ads [will be the business model]."

Video gamers streaming Google Stadia

Ads in games are a $3 billion market today, according to Eric Haggstrom, a forecasting analyst at eMarketer. But most of that revenue is in-game ads for mobile games, which are generally a less refined experience than the high-end games Stadia plans to offer.

Still, Haggstrom thinks having ad space within Stadia games could be a compelling offer for game publishers.

"If you’re a new battle royal game that just came out and you want to get people playing your game, ultimately the best place to advertise would be within other games that are similar," Haggstrom said.

Haggstrom thinks the Google service is likely to adopt a similar approach to the mega-popular Fortnite, which doesn’t charge players to download its game, but instead allows for in-game purchases of "skins" and other cosmetic items. This type of in-game purchase model could make sense, he believes, given Stadia has been touting an open platform with very few barriers to entry.

Not everyone’s in the dark

For one important group however, Google is being a bit more forthcoming. Google’s Buser said he’s already been sharing Stadia’s revenue model with game developers to help get them on board.

"Some games can take years to make so in order to get a game developer to create for your platform you have to show them that it’s going to be financially viable for them," Buser said.

Given what’s a stake, Google can’t afford to lose game developers.

If Buser and the Stadia team finally find a way to create a meaningful business outside of advertisements for Google, the ramifications for how that model could be applied elsewhere across the tech giant’s properties could be massive.

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