OnLive cloud gaming service swears it’s alive

Onlive or OnDead?Yesterday, we reported that rumors were bouncing across the Internet regarding the possible closing of cloud gaming service OnLive. As anonymous sources start speaking to the press, it’s becoming clear that OnLive services will not disappear immediately, but that’s little comfort to its former employees. 

OnLive has issued a statement saying that the company’s assets have been transferred to a newly-formed company “backed by substantial funding.” So for users, service should continue uninterrupted as the new company maintains OnLive’s servers and infrastructure. Of course, there’s no assurance that users won’t be hit with new subscription fees, or that the service won’t disappear if the new owners decide they’d rather unload the company’s assets rather than fix its problems. But it’s at least an offer of continuity for OnLive subscribers.

OnLive staff won’t be so lucky. Anonymous sources are claiming that at least half of the staff has been laid off, and others allege that as many as three quarters of the staff has been let go. OnLive’s statement claims that while it’s starting a new life with a skeleton crew, it plans to re-hire more of their former employees in the future. However, Kotaku reports that the re-hired employees will be paid in nothing more substantial than stock options, an unappealing compensation package from a new company with an uncertain future.

Stock options look especially dicey considering that there’s no indication that OnLive is on track to solve its fundamental problem: Massive infrastructure costs to support a relatively small user base. According to a report at Joystiq, CEO Steve Perlman blamed the company’s collapse on the cost of maintaining 8,000 servers, complete with demanding contracts, to support user numbers that never got above 1,600 simultaneous players. Lag-free cloud gaming is incredibly technically demanding, so there was never a way to avoid massive startup costs. Unfortunately, the users didn’t appear in large enough numbers to pay for all those servers, and OnLive competitor Gakai was the one to get the buyout offers that could lead to a tidy payday.

Ironically, this is happening after what was looking like a good year for OnLive. The company was going to be supported out of the box by the Ouya console, which had become a dramatic success story on Kickstarter. The OnLive Remote Desktop service impressed our reviewers in hands-on tests. Vizio recently announced a new set-top box that would provide video-game streaming via OnLive. And the company’s experiments in streaming games to tablets and smartphones seemed extremely promising. If the reformulated company going to stick around to see all these opportunities through, it will need to bring costs and revenues in line, and fast.