Why OnLive's Failures Benefit The Future of Gaming

Tony Wei of OnLive explains Cloud-Gaming technology to people at their booth at E3 expo in Los Angeles (Photo : Reuters)

On Friday, cloud gaming service OnLive bent its knee to a new, as yet unknown, investor and let go of 50% of its staff as a result of fatal management errors. 

What Went Wrong?

Despite the unfortunate reality of the company's layoffs, OnLive's potential rebirth as a successfully managed, thriving service may signal a new opportunity for the evolution of streaming game content.  

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In a final meeting with his employees, OnLive Founder Steve Perlman revealed what poisoned its business model to the point of bankruptcy: lengthy server contracts.

He states, "There's no way to exactly estimate how many servers we'd need. So we literally bought thousands of them, and all the equipment and networks to go with it...If you've got 8,000 servers and 1,600 users, how could we ever get a cash flow positive, right?"

Perlman also cites the company's "dramatically expanded number of employees" and the fact that OnLive "made it through the whole recession without any disconnects, any layoffs, or any down rounds."

With rigid contracts limiting the company's ability to adapt to user demand and management that decided not to downsize when necessary, the business model was set to fail. The company was simply crushed under the weight of its own expectations.

Streaming Content

With Kindle sales increasing exponentially every year, the dominance of digital stores in the music industry growing, and an increasing amount of smart handset devices being sold, it is clear that physical media is diminishing. Naturally, technology industry giants place tremendous value on specialized digital services.

In the case of competing cloud gaming service Gaikai, that value is $380 million, the price that Sony Computer Entertainment paid to acquire the company in July.

Sony's released the following official statement:  "SCE will deliver a world-class cloud-streaming service that allows users to instantly enjoy a broad array of content ranging from immersive core games with rich graphics to casual content anytime, anywhere on a variety of internet-connected devices."

Clearly, both OnLive and Gakai's niche in the content streaming market will be an important part of the entertainment industry's future.

The Outlook

Granted OnLive's restructuring returns the company to profitability, the service would provide healthy competition for Gaikai and push forward how and where we game.  

Batman Begins' Thomas Wayne once asked, "Why do we fall?"

It remains to be seen whether or not OnLive can "learn to pick [itself] up", but if so we can all benefit from its recent failure.