Posted by: seanmalstrom | April 1, 2009

OnLive was a dumb investment by dumb investors

One of the things that came out of GDC was OnLive.

First off, this has nothing to do with games themselves. It is focused on the gaming hardware… that is… of eliminating it. OnLive cannot be any change to the games of how gaming is done. OnLive’s stated aim, and of what they show, is to remove the obstacle of hardware.

How in the world can I call this ‘dumb’? Five reasons why:

First, this is going to be a subscription model due to the service. We do not know the price and all of this so until we do, there isn’t much to say. Aside from MMORPGs, gamers do not like paying subscription fees. When pricing is announced, there will be more detail on this of course.

Second, gamers demand control over their experiences. Publishers will love this service since it means the gamer never owns the game. Or to put it another way, the gamer is never in control of the game. This means the gamer cannot sell the game, cannot pirate it, and cannot cheat with it (publishers have to love that). If service is slow or down, the gamer is out of luck. Gamers like to *own* their games which is why the market has rejected essentially any model where the game is not allowed to be owned. DRM is routinely rejected. Gamers don’t want to rent any game, they want to own it. While one can say that digitally downloaded games are not ‘owned’, they are clearly in the players’ control for the most part. And most importantly, when they stop paying for a subscription, these games don’t just ‘disappear’.

Note that the OnLive site and all keeps referencing ‘technology’, never ‘customers’. A technology emphasized approach won’t work because…surprise… gaming is in the entertainment business, not technology business. I’ve never seen any proposal for any product, be it game or device, succeed in this industry when its trumpet is honking ‘technology’.

Third, and most important, the hardware barrier isn’t set in stone. Like all things, prices drop and hardware shrinks. The HD Twins will keep getting cheaper. Already, the Xbox 360 is cheaper than the Wii. PC hardware keeps getting cheaper. Netbooks don’t have the power to run the best looking games, of course, but in a few years netbooks will have more capability. And is it worth hooking up that OnLive apparatus to a tiny Netbook or even TV? It would be much simpler to just buy the hardware itself since it is only a couple hundred dollars. Due to subscription rates and how gaming habits (unlike movie or TV habits) are erratic, it’ll likely be cheaper to just buy the hardware.

Fourth, there won’t be future generations of ‘graphics’. Someone might respond to the previous point and say, “Golly, it doesn’t matter if prices for current hardware drops. There will be the Next Generation! And this will solve that Next Generation!” But there won’t be any ‘next generation’ as we traditionally know. There won’t be a, say, Super HD Generation  because graphics have reached ‘good enough’ where improvements won’t be seen by customers and because it would break the bank on producing games. The shift has gone toward user interface. The next generation will be upgrades and changes in user interface, not graphics.

OnLive is a solution to a problem that is fast approaching a deadend. This isn’t occuring just on consoles but PCs as well.

Fifth, OnLive lies by saying you can play every game on it. Not true. You cannot play the Wii games and many PC games. For their controller, all I see is a standard controller that you would see for the Xbox 360 or PS3. I don’t see a motion controller. I don’t see a mouse and keyboard (but let’s assume they can be plugged in or used via any computer).

I’m still shocked to say that many of the eggheads talking about the game industry never differentiate Nintendo, from Sony, Microsoft, and PCs, for being an integrated hardware/software company. OnLive would have to set up a motion controller and a sensor bar in order to play Wii games. Sony and Microsoft might be able to skate around the patents, but I doubt OnLive has the pockets to do anything like that.

To sum up, OnLive is attempting to solve a problem that is becoming less and less a problem each year.

You know what would have been a true disruptive way of doing this? It would be to let the customer be at the center of the cloud, not some company trying to turn all gaming into a subscription model. No matter where I would be, I would be able to play THE GAMES I OWN anywhere I want on any device that has a screen and fast enough connection.

The press has gone into hype mode on this.

On VentureBeat, Dean Takahashi calls it a revolution and a disruption.

Few startups have a chance to revolutionize an industry. But if entrepreneur Steve Perlman’s OnLive lives up to its goals, the company will disrupt the entire video game industry — to the delight of both game publishers and gamers.

Disruption, by using the Christensen model, has a definite definition. Is OnLive a profitable service? We can’t know because no price has been announced. Disruption is literally ‘crappy products for crappy customers’. Is OnLive a ‘crappy product’? Is it servicing ‘crappy customers’? It is no on both. (OnLive makes the dangerous assumption that those who are not purchasing HD consoles or upscale computers is because of hardware cost. It is actually disinterest.)

The entire service is aimed at removing the hardware barrier from Core Gaming. But the problem is that hardware is not the barrier that hinders Core Gaming. The true barrier is the interface (which isn’t being changed by OnLive) and the games themselves (also not being changed by the service). The bottleneck to HD Twins’ sales is not the price of hardware. We know this because price cuts haven’t avalanched the HD Twins’ sales.

Solving a technological problem is often mistaken as solving a business problem, but the business issue is far harder. This is why engineers do not become CEO, salesmen and marketers do. The rest of Dean’s article prances on, declaring the death of the consoles, and ceases to be any article but de-evolves into something like pep-rally with cheerleading paragraphs and pom pom speculation.

Gamespot has a story about our analysts being ‘sold’ on it. Let’s take a look:

This morning, Wedbush Morgan Securities’ Michael Pachter sent investors a note on GameStop bearing the dire title, “The Beginning of the End.” While the actual content of the note was a little more reserved in its prediction, Pachter said OnLive could accelerate the industry’s shift to digital distribution.

In his own note, Signal Hill analyst Todd Greenwald told investors that OnLive is “stealing the show” at GDC 2009. Beyond the appeal to publishers and danger to the used-game market, Greenwald noted that OnLive’s streaming would eliminate the need for console cycles entirely, since any hardware upgrades would happen beyond the consumer level.

“While there are still many details still unknown (pricing, launch date, retail distribution), this has the potential to be a game-changer,” Greenwald said. “In our opinion, OnLive needs to launch with a big marketing campaign, to ensure that this becomes more than a niche product and caters to more than just the hardcore gamers and tech-savvy early adopters.”

He added, “While this won’t happen overnight, we think that the ‘long-term threat’ of digital distribution just got accelerated meaningfully.”

Do video-game analysts not know the definition of ‘digital distribution’? OnLive doesn’t distribute any games to the customer. This isn’t digital distribution, it is remote playing. It is like an infinite rental service.

OnLive might become a Netflix of video games, at best, but its impact on the traditional model will be none.

At Time, Grossman said this:

The consequences keep on unfolding in my head. I mean, I’m not generally a fan of turning games from a product into a service: I don’t like renting — I’m an iTunes guy, not a Rhapsody guy. I like to own my hardware and software. But think about it: all at once, OnLive could make hardware irrelevant. I played Crysis on a MacBook Air that was hooked up to OnLive, and it was spookily crisp and smooth. Something that can make a MacBook Air into a high-end gaming platform? That’s going to change the landscape. Hell, I haven’t been a PC gamer for years, because I couldn’t keep up with the relentless upgrade agenda, but OnLive takes that out of the equation — they upgrade their hardware for you. (You don’t even need a PC or a console at all: OnLive will sell you a little cigar-box-sized dongle-type object that hooks up directly to your TV, that will process their signals for you.)

This is funny because Grossman was being honest with himself. He, personally, disliked the idea of not owning, always renting. But he genuflects before the ‘technology’ as it that is that is what the market is about (this same genuflecting occurred to the PS3 before it launched).

I like him mentioning his Mac Book Air. The Mac Book Air is very slim, very portable, oh yes. But how will he feel when he has to connect the dongle to it? Makes it less sleek. And who is going to carry around the dongle with them? Most people won’t risk that so they will leave it home. And home is where their game console hardware is at anyway.

Likewise it shifts the market from owning to renting games. OnLive puts the whole gaming ecosystem into a blender and liquefies it: no hardware, no hard media, just pour it all down the pipeline.

Hehe, it does not ‘shift’ the market. No product ‘shifts’ the market. Only the market, customers themselves, shift the market. Now, if customers think this is the greatest thing since the Wii, then you can call the market shifted.

But he nails it by saying this is nothing more than a rental service. It is bad for GameFly. It might be good for some PC games since the PC game won’t crash on you (supposedly) due to consumers using the same hardware configuration (of whatever the OnLive guys set it).

From CNET via CNN:

The upshot of this infrastructure model, Perlman said, is that OnLive is somewhat future-proof, meaning that players won’t have to upgrade anything to keep on playing games on the system years into the future. Instead, the upgrades will happen on the back-end, with the company regularly boosting the power of the servers it uses to host and stream the games.

Where have we heard this before?

From the outset, OnLive isn’t partnering with any of the first-party publishers–Microsoft, Sony, and Nintendo, meaning that franchises like “Halo” or “Zelda” won’t be available. And that makes sense, since those companies are hardly likely to want to sign up with a company whose very technology may obviate their longstanding business models.

That means, Perlman and McGarvey acknowledged, that many players who sign up for OnLive’s service will still maintain their consoles, and continue to buy games for them. At least for the rest of the current generation of machines, they said. But come the next generation, all bets are off, they said.

And you thought the PlayStation 3 strategy was stupid for this generation! At least Microsoft and Sony were betting on the past, that graphical upgrades to ‘next generation’ would sell their machine and games. Now anyone paying attention cannot say that there will be a ‘next generation’ in regards to bumping up the graphics even more, a type of Super HD Generation. What is going to happen is that the HD Twins will ride their current hardware as long as possible with the next generation be focused on the user interface (due to that Wii success, of course). Even the video-game analysts know this.

But OnLive and their dumb investors have not realized this. They actually think the future of game consoles will be based on expensive hardware and more ‘graphics’, whereas the future will be more on the user interface.

What we are seeing is a business venture who is seeking to ‘undercut’ a market that has already shifted another direction. OnLive is like someone trying to undercut automobiles by saying, “You can rent ANY automobile you want!” without realizing that the customers have shifted toward planes (i.e. user interface).

I thought Sony would get the big doofus hat, awarded to companies who misread the market at the end of this generation, but OnLive might beat them to it.


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