CRANKY GENIUS

No pun intended but this is a game changer.

OnLive is harnessing the power of cloud computing to give its subscribers gaming on demand. The game doesn’t reside you the subscriber’s PC. Instead, the game is installed on a super high end PC located at a remote datacenter, and only the audio-video feed is streamed to the player, and the data from the player’s controls are streamed back to the datacenter.

The speed of the user’s internet connection determines the resolution at which the game is displayed, and if a subscriber doesn’t have a PC or Mac, a small box roughly the size of a pack of cigarettes receives the a/v feed, decompresses the signal and displays it on a TV.

This is not some vague vaporware promise either. OnLive was giving hands on demos to anyone who walked by their booth at GDC 2009. OnLive is real. But they face a few technical, financial and legal hurdles. If they can keep the cost per subscriber low enough to make the monthly subscription attractive to millions of subscribers, all while delivering on the technical promises, this may be the most disruptive event in game software entertainment since 3D graphics and the CD-ROM.

If OnLive succeeds (and that’s a big “if”), this is just how disruptive games on demand will become. Here are the likely losers.

Retailers. Why bother going to Best Buy, Walmart, or GameStop to buy a game? Why rent it from Blockbuster or GameFly? Just fire up my OnLive microconsole and play on my digital TV.

PC hardware makers. Game software has been the driving force in pushing video card technology to the current breakneck pace. Game software has also been the reason PCs have become beefier with several gigahertz of speed, gigabytes of system RAM and terabytes of local storage. With cloud computing handling the steep technical requirements for today’s games, the consumer demand for killer gaming rigs costing $4,000 will diminish like the demand for salmonella-laced Nutter Butters.

Platform manufactures like SCEA, Xbox and Nintendo. Imagine you are EA Sports and are about to release Madden 2010. If EA Sports makes the game for Xbox 360, they have to pass stringent standards requirements, pay $10 a copy to Xbox as a royalty and then pay for manufacturing and shipping to get the game into Best Buy or Amazon. Game software is easily ported (or repurposed) to other platforms, and this means the Xbox 360 version of the game can be easily altered to be played on OnLive. The platform manufacturers have to be shatting themselves.

Big publishers. Boilerplate contracts between game software publishers and game software developers tend to have language detailing that the developer assigns certain rights to the publisher, and those rights may be limited to what platforms the game can be published for. For example, say Studio X (not a real developer) negotiates a contract with publisher Zero (also not a real publisher) and in the contract Zero owns the right to distribute the on physical media that only works on a PS3 and X360. Later if Zero wants to repurpose the game for Mac and Windows users, Zero must renegotiate with Studio X to get those rights. This much is certain, on-demand game software the way OnLive plans on delivering it was on no one’s radar, and every contract will have to be renegotiated before the game will be released to OnLive. This gives independent developers, like Studio X, a lot of leverage. On top og that, if Studio X is self funded, Zero will get bypassed altogether.

Operating systems. Microsoft finally realized recently that game software was driving the demand for beefy PCs that require Microsoft to update Windows to support higher end hardware and new display technology. Suddenly the demand for PC games dropped because SCEA and Nintendo were stealing the market. Using a carefully orchestrated campaign called Games for Windows, coupled with the rise of MMOs and casual games, gamers are coming back to the PC. But OnLive could prove to be a major setback for this effort because the demand for new hardware and updates to Windows would evaporate overnight.

Video card manufacturers. ATI and NVIDIA depend on gamers to stay in business. GPU processing for games will still be needed but these will reside on servers at the datacenter and not on gamers’ rigs.

Here are the winners if OnLive succeeds

Content Providers. Game developers clearly win because the cost of goods a distribution won’t be deducted from their royalties. Indie developers can even bypass publishers altogether.

The latest buzzword in social trend analysis is “disruptive.” It means a permanent shift to a new way of doing things. The printing press was disruptive. Radio and television was disruptive. The Internet is the definition of disruptive.

OnLive needs to solve a number of technical challenges to ensure the end user has a pleasant (i.e. non-frustrating) experience. For example, if the user’s download speed is at a typical DSL downstream rate and OnLive can only deliver a resolution of 480 x 320 at that speed, the adoption rate wouldn’t pay for the infrastructure and the cost per user would exceed income. Fail.

But if they can get a DSL connection to match the 720p resolution of digital TV (basically DVD quality), then No Fail. However, broadband, though seemingly ubiquitous, is not quite everywhere just yet. Rural communities still use dial up or satellite and they still need games delivered on physical media.

The financial challenges have got to be monumental as well. The cost of co-locating PC hardware at a datacenter is enormous, and the datacenters have to be close enough to the consumer in order to have a respectable ping rate. And then there’s all the redundant systems and monitoring technology that have to scale and come online in the case or hardware failure or sudden spikes in demand. This costs big buck, but then add the manpower layer to the ongoing costs, and now the cost of overhead becomes daunting. Can OnLive keep these costs low enough to keep the monthly subscriptions within the reach of most gamers? With over 180 million Americans calling themselves “gamers,” attracting even 15% of that figure to become OnLive subscribers could be enough to sustain the business.

The key will be the content, the third challenge looming over OnLive. Getting publishers and developers on board to offer high quality content to attract a large enough user base is a not a new concept for the game software industry. Every time a new console is introduced, game software publishers have to play the whole chicken and egg scenario in first twelve months following the console’s release. This will happen for OnLive too, but probably only once as the traditional console market fades away (at least that’s what OnLive should be hoping). To accelerate adoption, existing blockbusters could be hosted on the service to assist in building the user base more quickly.

But the real key challenge is keeping costs low so the revenue sharing structure based on how long a player plays a given game generates enough cash to keep all parties profitable.

It’s a big gamble, with lots of excitement. And it could change the world of game software forever. IF they succeed. (Lest we forget Phantom.)