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Cloud gaming firm forced to find new investors, commit to big layoffs

The fall of OnLive has rocked a host of top industry players including AT&T, Inc. (T), HTC Corp. (TPE:2498), and Autodesk, Inc. (ADSK).  The reports have many asking what exactly OnLive is and why so many top companies would bet and lose big on the firm.

I. Great Expectations

OnLive certainly was founded on a clever premise.  It bet that while gamers were emphasizing mobility over graphics these days, that they would still jump at the chance to get enthusiast-caliber graphics on the go, if it were possible.  

So OnLive cooked up a cloud service scheme where its high end gaming rigs rendered and streamed video at 720p (HD) from 300 best-selling game titles.  The service quite literally could allow you to play high-end titles like Assassin's Creed II on lightweight laptops with low-end integrated graphics.

OnLive


OnLive allows you to enjoy top-tier gaming titles on low-end hardware.  It also briefly flirted with controversy, allowing you to use Microsoft Corp.'s (MSFT) Office suite on the Apple, Inc. (AAPL) iPad.

The intriguing premise of cloud software and gaming pulled in the high-profile investors.  And today the company boasts 1.5 million "active" subscribers and 2.5 million total subscribers.

Among the various plays OnLive was trying was the "MicroConsole", a small set-top box that looked to compete with traditional consoles via controller-based streamed gaming from the cloud.  The company was also on the verge of rolling out its most ambitious service yet -- streaming gaming for tablets and smartphones -- when the cash ran out.

II. Restructuring

Ultimately the cost of its five data centers -- located in California, Georgia, Illinois, Texas, and Virginia -- outweighed the payments from partners like AT&T and the payments from ongoing customers (typically $4.95 USD/month).

Seeing the investment go down in flames, the investors killed the company name OnLive, Inc. using a financial mechanism called a "Assignment for the Benefit of Creditors" (ABC) to avoid the unit falling into bankruptcy.  The majority of employees at the company data centers were also laid off.

Data Center
The cost of running the data centers to maintain the service was too much for its corporate backers.
[Image Source: Wired]

Under the restructuring, the assets (aka, the data centers and subscriptions) will be acquired by venture capital investors Lauder Partners.  Lauder Partners had previously injected a small stake in OnLive in 2009.  The VC firm is now the "first investor" in the new entity, which is simply referred to as OnLive (no "Inc.")

OnLive has released a statement commenting:

The OnLive Game and Desktop Services, all OnLive Devices and Apps, as well as all OnLive partnerships, are expected to continue without interruption and all customer purchases will remain intact; users are not expected to notice any change whatsoever. OnLive’s current initiatives will continue as well, with major announcements of new products and services planned in the coming weeks and months.

In other words, customers should continue to enjoy their games and not really notice much change, assuming Lauder Partners can run a tidy house.

III. HTC Gets Burned, Some Folks Get Their Jobs Back

The new OnLive calls the layoffs "a heartbreaking transition for everyone involved", though it promises new hiring "upon closing additional funding", which will allow it to continue "transforming the OnLive vision into reality."

OnLive
OnLive hopes to continue to deliver uninterrupted service and to hire back many of its laid off employees. [Image Source: Engadget]

Adding more details about the layoffs, the company writes:

Almost half of OnLive’s staff were offered employment at their current salaries in the new company immediately upon the transfer, and the non-hired staff will be given offers to do consulting in return for options in the new company. Upon closing additional funding, the company plans to hire more staff, both former OnLive employees as well as new employees.

Exactly how much each investor lost in the deal is largely unknown.  However, HTC revealed today that it was burned for $40M USD in the process.  For the fiscally struggling Taiwanese smartphone maker, that's not the only troubled asset. HTC in July announced its intent to offload half of its 51 percent stake it acquired in Beats.  It acquired the stake for $300M USD, but will likely lose money on the exit, as with OnLive.

In the big picture, what happened here? Private investors -- including institutions such as HTC -- got burned the worst.  

Employees were hit as well, with some losing their jobs, and many being forced into lower-paid, volatile contractor positions -- positions which typically do not provide medical benefits.  

The gamers are least affected, as they should continue to enjoy 24/7 service as normal -- for now.

What are the lessons learned?

Cloud computing can look great on paper -- but without a tremendously disciplined approach from a cost perspective, even the most promising startups can fast travel down the road to ruin.  Let this be a cautionary tale for those firms "in the cloud" to come.

Sources: The Verge, Engadget, PCWorld



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This article is over a month old, voting and posting comments is disabled

By someguy123 on 8/20/2012 11:11:01 PM , Rating: 2
The ping problem is an issue, but it's not as big of a problem as everyone thinks (in general, not onlive's service). Average television is already somewhere in the 40~70ms response time ranges, and even higher if you stack on post processing like motionplus. That's the type of response time similar to what you'd see in a server thousands of miles away. You can do a quick and dirty high-bitrate conversion of a video capture practically instantly, especially if you go for less computationally expensive codecs, though bandwidth costs would go up.

On-live just had nothing going for it. Their datacenters could not handle the bandwidth requirements at all and the ping times were mostly in the 100 ranges unless you lived next door. Even worse, they tried to mitigate bandwidth problems by going through heavier tiers of compression depending on connection speed, which just turned things into a mess of pixels. Maybe they were financially limited, but the service was just god awful regardless of physics.


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