4 mins read

It looks likely that OnLive is on the way out. There’s a story over at Forbes from late last week that claims there have been massive layoffs at the Cloud gaming company, and when you consider that OnLive’s greatest rival, Gaikai, just got acquired by Sony reducing your resources while the competition increases its is never a good sign for a business’ health.

This is something that every gamer needs to be worried about, whether you use OnLive or not, because OnLive’s failure will cause some significant ripples through the industry. Given that the industry is already a shaky one in terms of profitability, this is going to bite deeply.

Allow me to explain. Cloud gaming has been marked out as one of the brightest opportunities for developers and publishers to help put some margin back into their investments. “As-a-Service” initiatives (such as Gaikai, OnLive, PlayStation Plus or Xbox Live Arcade) are lucrative. Consumers think they’re getting a good deal with free games or premium services, but the lock-in (keep paying every year or you’ll lose access to those games) means that the platform owners suddenly enjoy an annuity income with very low customer churn. Why is this significant? It’s far lower risk than simply developing a good game (or indeed, console) and hoping it performs in the market.

So when OnLive & Co came along, publishers and developers were rightfully jumping on board to support it. Despite being a startup, OnLive’s done a great job in convincing publishers to sign up to it. And despite the financial trouble it finds itself in, OnLive was not want for customers. Every Cloud service to date has enjoyed a good level of customer support – even such services as Call of Duty Elite.

But here’s the rub – that support is there because there hasn’t been a high-profile failure yet. What happens when a Cloud provider goes bust? The servers disappear, and those games that people paid money to access are no longer accessible.

What happens when a high-profile Cloud provider goes bust? Costumers start to look at their own Cloud services, and wonder whether they’re going to disappear too. Other consumers suddenly start to think more carefully before signing up for new Cloud services. In other words, that confidence (or complacency) that currently exists with Cloud will no longer exist, and when that happens customer churn will increase and the platform holders will need to start cutting margins again to remain competitive and keep the numbers up – in other words we’ll be in exactly the same place we were before.

This downturn in consumer confidence will extend into all digital download services, since to many consumers there is no real difference between Cloud and downloadables, and so DLC will also be impacted. Given that a traditional “make box product and sell it to retail,” is no longer sustainable for any business at scale, a lack of consumer confidence in these new business models is going to hurt the profitability of the publishers and developers.

And as I’ve argued a few times in the past, unprofitable developers and publishers hurt gamers. Without the money coming in, innovation is stifled and fewer products are made.

No one wants that, so let’s cross our fingers for OnLive. If it is in such dire straits, perhaps Microsoft could be the one to bail it out?

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  • Honestly, I think you are taking this loss a bit too far. While I have no doubt that this will deter publishers from looking to put their games on streaming services, I highly doubt that this will have any affect on DLC or downloadable games services. DLC and downloadable games services are very different from streaming, as there is some sort of ownership involved with them (at least in the act of being able to download the content and access it whenever the user wants to). With streaming services, people have to put their entire faith into a company that has complete control over how and when the games that the consumer purchased can be played. Apart from being the reason why I have mostly avoided said services, DLC and Steam are still going strong and they show no signs of immediately stopping or having significant losses.

  • That last comment is the point I'm making though – these things are going well at the moment because there hasn't been a high-profile failure. OnLive will be the first.

    It's not so much whether publishers will continue to do these things such as DLC and streaming – it's more a question on whether customers will continue to buy these things, once it becomes clear that there's no guarantees that these services will continue. We all assume they will when we sign up for them, but people's attitudes can and will change once they realise the reality is that there are no guarantees.

    As for the question about whether people realise the difference between streaming and downloads – you and I do, but we're fully invested in this industry. I know for a fact that the big guys in the Cloud world – not just gaming here, but Cloud businesses in general – spend a great deal of money explaining the benefits and differences between Cloud and "traditional" software solutions.

  • Before I even finished getting through this piece, I was already starting to reflect on what this purported downturn means for digital distribution as a whole, so I was pleased when you pointed that out also. An overall fair assertion.

  • I do not want the new gens going to only online downloadable games as like u said if something happens we are fucked. Having the game in hand lets me play the game without my profile being online or not or even using a profile to pay. Companies only want online downloads because they want the money and it is easy for them to track who has it but what about the people who buy the games? The people who buy disc games buy them because they have a real copy of the hard work that was put into making that great game. How do I feel when I buy a game online? I feel nothing. I cant show off my online game to friends or peers. Online things should be kept to a limit not force everything to online download as that is unfair to the customers who buy them because they are forced to not because they like it better that way.

  • Hi John,

    Thanks for the input! I needed to slightly moderate your post (we have a strict 'no swearing' policy here to be family-friendly, so to speak), but we appreciate your input.

    With regards to what you've said, it's not so much that these companies "want" the money. They need it, or we don't get new games, let alone interesting, original and innovative games (those cost much more to make than "yet another sequel") – in other words, a company *has* to maximise its revenue and profits.

    Unfortunately, selling retail boxes is no longer sustainable – thanks to rapid price-cutting and a powerful second-hand market, there's just no money to be made there any more. So Cloud and downloadable games really are our best hope for maintaining a healthy and vibrant industry (and have lots of good games to play). 🙂

  • MATT SAINSBURY, Yes exact! look at Onlivefans forum who angry, insane, lost their trust, ANXIETY, sometimes blame EACH-OTHERS, on and on after onlive's damage done. THAT'S an example.

  • Hey there Matt, from what I have read (at least 2 days ago) Onlive is not going away as a service. It's just that everything will be transferred to another entity… something like that.

    But the worst part of the news is that the company owner fired all the employees to reduce liability and their stocks deemed worthless. Actually that part of the news is what really interested me rather than its consequences with the video game industry as a whole. It's really, should I say, sad to see this happen. The employees, who apparently even work overtime for the heck of it (and because they have their stocks with them) now have nothing. There was this one employee whose wife is pregnant, they don't have savings, only has their stocks, and now, those stocks are worthless. Just sad.

    In an update about the news, it looks like half of the fired employees will be offered employment by the New Onlive (which will still be run under that name) half might be offer options. The service will continue. But it was really really shady. Looks like the company tried to be acquired without the baggage of previous stock options and stuff and also for a lower value? Why? Because the brand itself is deemed valuable. Perhaps the reason Sony settled with Gaikai is because its value is lower than Onlive.

    Whatever happens at this point though, I can't imagine how the new Onlive will get through this one hell of a negative PR.

  • Hi Michael,

    Thanks for the clarification. 🙂

    That said, it still doesn't resolve my fears. I've seen similar… questionable… business moves in the past, and usually it's because there's underlying issues that mean the business is essentially unsustainable.

    Or in other words, stuff like this happens to "kick the can down the road." The immediate future of the company is protected, but unless said company can revert to sustainability or find someone to acquire them, there will be the point where they reach the can again, and that's when things really start to sour.

    Fingers crossed that doesn't happen though, because I like the idea of OnLive, and I had hoped to see it come to Australia eventually.

  • I disagree. I think gaming wasn't really ready for mass adoption of cloud gaming, in the same way that cloud services in general hadn't seen the mass adoption the tech community expected to see by and large. Worldwide internet standards just aren't there yet.

    What this will do is make the gaming community reconsider the existing physical games market. Retail sales still comprise the majority of all game sales, and it makes more sense to continue to invest in them than to transfer to digital completely. It may put game developers at a disadvantage, but the upside is we won't have to give up our ownership rights to our games to them.

  • Teething troubles, I think.

    I don't really agree that the industry is in dire straits, more that it's become commoditised. There's less and less to distinguish products, as evidenced by the fact that we (the fickle gamers) move from one to the next fairly fluidly. Commoditised industries rely on volume, marginal differentiation (hence all the PR) and constant innovation. Businesses that deal in commoditised products need to change, morph, evolve, churn and (occasionally) fail. That's all. When one bean manufacturer folds, we don't automatically assume that it's the end of beans as we know them.
    Rest easy in your beds. Gaming is here to stay.

  • Howdy Rob,

    I agree that the games industry is undergoing a period of commoditisation. This isn't unique to the industry – music and films went through it as well. The difference is that the games industry has surprisingly few value-add options to maintain the necessary margins for healthy businesses.

    So for instance, the film industry has the cinema. Music has live concerts. This is where the real money is made for these guys – DVD/ CD and download sales are all quite low margin.

    The games industry doesn't really have that. There's a limited appeal in collectibles – you just need to look at Angry Birds for an example of that at work, but aside from that you're looking at an industry that is increasingly relying entirely on products that provide no margin.

    DLC and Cloud computing could have been that value-add, but as gamers hit that trough of disillusionment (Gartner hype cycle: http://en.wikipedia.org/wiki/Hype_cycle) it's not just the niche players like OnLive that are going to suffer.

    No "crash" destroys an industry entirely – even the gaming crash in the early 80's – but I do believe we're heading towards a very "crash-like" time for games businesses.

  • "Crash-like". I like it! Most industries go through this phase, though, before settling into something less frothy and more sustainable. The good thing for gaming is that it's populated by creative types and there's huge (and growing) demand, so there's every cause for optimism. Change can be a good thing!

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