OnLive Game Service on LG G2OnLive, the most prominent game streaming company is no more. The Company has apparently been experiencing financial difficulties, and had to lay off about half of its staff. People left the company with boxes late on Friday. The company says that its assets have been purchased by a “newly formed company with substantial funding”.

I’ve discussed the challenges of the cloud gaming business back in 2008, but the news came as a shock to the web industry as OnLive was seen has the “natural evolution” of traditional video games, and many were expecting high end game consoles to to be eventually replaced by cheap boxes connected to the network. That explains the recent noise about Ouya, a $99 Android console, which has raised more than 6 million of dollars in funding. OnLive was announced for Ouya recently.

The demise of OnLive is a stark reminder that the video game streaming business is an extremely difficult one, and that it is still very much “experimental”. That said, OnLive deserves some credit for pushing the model as far as they did. So… what happened?

Gaming looked decent, with some compromises

If you’re not familiar with the technology, OnLive runs games from their datacenter and streams the screen content to the players in their homes. In return the player sends commands back to the datacenter. You can think of it as a Remote Desktop which was fast enough for gaming. Read our first hands-on with the service.

The time that it takes for the data to travel back and forth is called “lag” (in milliseconds), and that is a very challenging and expensive problem to solve. The farther the data center is from the player, and the higher the lag is, and the less playable the game becomes. In order to expand, OnLive would need to build more datacenters, and that’s not cheap…

Additionally,  streaming games does take a toll on the latency (when compared to a regular console), but also on the graphics quality. In our own tests, we noticed a significant visual degradation which was due to the video compression necessary to speed up the streaming. Yet, it was functional enough to play.

Tough business

The service did not catch up as fast and as much as OnLive would have hoped. First of all, OnLive had a hard time to sell the service for a monthly fee to players around the country. In fact, everyone else is also having a hard-time selling a subscription-based gaming. Even established hardcore game companies like EA are looking at removing the subscription fees and count on in-game add-on sales to finance and profit from their games. Would you buy a $99 box and pay $15/mo, or pay $199 and have a console at home? The economics simply did not resonate with players.

Finally, OnLive could never get the top PC titles, and never got a chance to even envision entering the console market (PS3, Xbox 360 games), which is where the big money is. It is clear that as the game streaming technology propagates, traditional publishers, and even game studios will stream their games without the need of OnLive. Sony has acquired Gaikai, an OnLive competitor and there is no doubt that Sony will be amount a much more powerful game line-up than OnLive ever could. Cloud gaming can still change Sony Computer Entertainment forever… one day.

Game streaming lives on

The failure of OnLive does not mean that game streaming will fail as a technology. However, it shows that the expectations were a little too high (forget about “uber-gaming” in the cloud for now), and things just didn’t plan out as pundits expected. Game streaming still faces many challenges. The technical challenges will get better over time, especially with faster networks or things like GeForce Grid, but as the technology becomes easier to master, the question is : who will command that market.

In open markets like PC gaming, the developer/publishers should gain control, while on closed platforms like game consoles, the console maker (Sony, Microsoft) will still control every aspect of the game distribution.

What do you think? Are you shocked by the demise of OnLive?

Update: OnLive will continue its service under a new owner, and will re-hire part of its laid-off workforce as contractors.

Filed in Featured >Gaming. Read more about business, onlive and Opinions.

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