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Machiavellian said:

I believe you forget that MS already stated that every X1 game gets a dedicated server for free in which the developer can use as they please, Second is the cloud base platform Orleans that MS has developed.  Orleans allows pieces of code to run server side called grains.  These grains can be replicated so that multiple servers can operated on that piece of code.  Also those grains can be operated anywhere in the world an computed locally to a datacenter where the gamer is located.  This is how MS plans to tackle the cloud compute and its a platform they have been building for over 3 years.  Also, you really only have to have one server run an instance of the game and send pieces of code to other servers to process those results and send to the console.  Think of the main dedicated server as a traffic controller where it direct multiple cars to different paths.

So using Orleans, pieces of code that run server side can be crunching parts of a game constantly.  If done correctly, the server side code can already have the piece of code completed since a lot of stuff will not really change if processing environmental effects and just streams that info to the gamer console when they reach a certain area.  The info can be streamed in advance so its ready once the user gets to that section.  

Gamers have to stop thinking about the cloud rendering a scene instead of just performing calculations.  Even rendering a scene can be done by using similar techiques like Gaikai/Playstation now.

This stuff is how distributed cloud services work today and really not that new.  The thing is, its new for game applications which is why such services will take time as developers work out different solutions for how their game work.

I worked on such a system myself in the past long before it was called cloud computing. Yes the server can do it much more efficiently then running a separate game for each player, yet it still needs to keep a seperate data instance for every player running alongside. I mean if it were a simple case of everyone experiencing the exact same thing, thus minimizing data instance needs server side, you can more easily pre-compute all that and put it on the disc. If the player has a lot of influence on the world (destruction, foot prints, tire marks, displaced items, smoke grenades, etc) then the server load grows quickly.
Btw every system getting a dedicated server for free is nonsense, those are virtualized servers.
Anyway we gave up on that 'cloud' system at the time due to bandwidth and latency being the bottleneck. It is now just serving up data asynchronously to be used at the device's convenience. Bandwith limitation is still the biggest bottleneck today and will be for the rest of this generation.

Orleans is an impressive flexible standardized platform for dedicated servers. Bandwidth and latency limitations however restrict it's usefullness to enhance how games look. It can enhance the content, not help out with rendering.