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Aug. 17, 2012, 5 p.m.
Michael Inouye Senior Analyst

Rumors today (August 17, 2012) suggest cloud gaming (and virtual desktop software) company OnLive is in dire straits. Some reports have claimed the company has (or will) undergone mass layoffs and is preparing to file for protection from its creditors. At the same time some individuals are also speculating that OnLive might have gotten acquired and these layoffs are transitional pains. The only official word from Onlive claims the company is not shutting down.

Assuming OnLive’s financial situation is as troubled as some of the news implies this could mean trouble for the cloud gaming market – at least for full scale independent B2C services. This could be part of the reason why Sony elected to acquire Gaikai instead of OnLive. Gaikai operated as a B2B cloud gaming platform instead of a full B2C service and was therefore less reliant on end consumer demand. In addition to operating services for clients Gaikai was also an advertisement platform that allowed developers/publishers to offer consumers cloud based demos. In the hands of Sony, Gaikai could evolve to become a more full featured gaming service under the PlayStation umbrella – this is likely another reason why Gaikai was more appealing to Sony (limited Goodwill or brand equity with OnLive).

So where does this leave OnLive and cloud gaming?

If OnLive was recently acquired, then this news coupled with Sony’s recent acquisition of Gaikai suggests deeper pockets are necessary to effectively operate and market a dedicated cloud gaming service. An acquisition does, however, bring reassurance about this distribution model’s future. If the company is in fact simply facing a daunting financial situation this would highlight the difficulties other companies have faced entering the gaming market and potentially call into question if a cloud gaming service operating independently could reach the necessary scale to justify the high server and operational expenses.

Regardless of the situation there is certainly interest in cloud gaming, at least from vendors within the industry. OnLive is part of Vizio’s CoStar (Google TV) STB platform and Ouya, the upcoming Android based game console, also signed on as a partner. Samsung and LG were also working with Gaikai to bring cloud gaming services to each companies’ respective connected platforms. The cloud as a delivery mechanism for gaming will continue to evolve and in time consumer behavior might adequately support an independent platform, but it would seem that time is not now. In fact OnLive, might simply transition to a business model similar to Gaikai’s and focus on B2B relationships, we shall see.

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