Can OnLive Really Overturn the Gaming Industry?

onlive_logoToday everyone who follows the gaming industry is talking about OnLive, an upcoming service incubated by Rearden, the venture company of Web TV Founder Steve Perlman. The system, which streams high-end video games to pretty much any PC, Mac, or TV with a broadband connection, was set to be officially unveiled tonight during the Game Developers Conference in San Francisco, but was pushed out earlier after the embargo on it was broken last night.

But can it really turn the gaming industry upside down, the way so many are predicting (as here, here, and here)? I attended a hands-on demo yesterday, and OnLive performed impressively, quickly delivering top games with a great frame rate, in a way that solves multiple problems plaguing large game publishers, such as piracy and low profit margins via retail sales.
However, even assuming the service works that well when it goes live to consumers this winter, at least three factors could hamper its adoption:
Is U.S. Broadband Ready For This?
While OnLive works with wireless broadband, Perlman acknowledged that running it on a connection shared by multiple users would impede its performance. (“Not a good thing to try at Starbucks,” as he put it.) That may include wireless connections in high-density cities, he added. Perlman told me most OnLive users will likely run the service from suburban homes through their own dedicated connection; still, connectivity complaints from OnLive’s urban customers may mar the service’s reputation in general. (Hardcore gamers are obsessed with low latency, which makes all the difference during multiplayer competition.) Similarly, you have to wonder what broadband providers, which are already introducing service caps, will make of OnLive. I raised this point with Perlman, who told me he’s been assured by broadband providers that his service won’t excessively tax their systems. (He even hinted that OnLive may ultimately partner with some providers to offer package deals.) That may be true, but if OnLive becomes as successful as Perlman hopes, broadband companies may quickly change their tune.
How Will Microsoft (s msft) and Sony (s sny) Respond?
Both the Xbox 360 and Playstation 3 already have broadband delivery systems of their own; to keep their consumers from jumping to OnLive, my guess is they’ll greatly expand and diversify these offerings. And while OnLive is launching with 10 major publishers, including Electronic Arts (s erts) and Ubisoft, none of them are Asian. This notable lacuna gives Sony a distinct advantage, as they have established relations with top Japanese developers. OnLive could supplant the Xbox line to become the Western console of choice — but as of this writing, its chances of capturing the market for hardcore Japanese games away from Sony seem slim to none.
How Big Is The Market For Next-Gen Games, Anyway?
OnLive COO Mike McGarvey told me during the demo that the company doesn’t see the Wii as a direct competitor since it doesn’t offer next-generation graphics like the 360 and PS3. (He declined to reveal OnLive’s price point, but said it would be “far less” than Nintendo’s game console, which currently has a $249 MSRP.) And while 360/PS3 fans will definitely be intrigued by OnLive’s awesome graphics, the market is tilting overwhelmingly to the Wii, which has roughly double the install base of those two consoles combined, according to VG Chartz. McGarvey suggested the Wii’s lead is mainly a function of its cheaper price and the novelty of its game controls, but I believe there’s a relatively limited audience of people who actually want next-gen 3D games. (Case in point: While both games were launched at roughly the same time, Wii Fit has outsold Grand Theft Auto IV, and still remains a top seller long after GTA IV has all but dropped off the chart.) OnLive may simply capture the next-gen market away from the 360 and PS3, but remain eclipsed by the all-games-for-all-people appeal of the Wii.
I do hope, however, that OnLive can deliver on its promise. Gaming will never truly be a mass market phenomenon until, like television, it’s accessible to everyone with a display screen. Perlman has assembled a truly remarkable team and technology which may finally succeed in providing just that. Then again, the history of the game industry is rife with products that aimed to overturn everything and in the end, only upended their investors.
Logo and image courtesy OnLive.