United Gamer Online (UGO)

by Chris Morris, CNBC.com
There’s a fox in the henhouse at E3 this year.

As Microsoft, Sony, and Nintendo promote their upcoming hardware innovations and try to extend the life cycle of this generation of consoles, a burgeoning company called OnLive sits on the show floor of the video game industry’s trade show, sending out the message that dedicated game machines could be a thing of the past.
The idea behind OnLive is simple: Games are stored and played on its centralized servers (the "cloud," in tech parlance) and pushed to users via a broadband connection. When you press a button on your controller at home, that action is transmitted virtually instantaneously to the game and reflected on screen.

On the surface, it sounds like a just another delivery method—but what makes OnLive and other upcoming cloud-based gaming services interesting is their ability to transform almost any screen into a high end gaming system.

Core PC gamers spend thousands of dollars to put together systems loaded with RAM and bleeding edge graphics cards to get the most out of their games. But with cloud gaming, a $300 netbook or low-end desktop will be able to play games just as effectively, with optimized graphical and other gameplay settings – since all the processing is done remotely. OnLive will soon launch a peripheral for television sets as well, letting you play in your living room.

The iPhone and iPad are next logical steps—and while the company hasn’t announced any formal intention to support Apple’s products, it has shown demos of the service up and running on them, indicating plans are in the works.

“Cloud computing promises to have a marked effect on the gaming industry,” says Scott Steinberg, head of the video game consulting firm TechSavvy and founder of Game Industry TV. “It offers new ways for gamers to access and consume games over a variety of devices and you don’t have to own expensive hardware to play those games.”

OnLive isn’t the only company exploring this space. Gaming industry veteran Dave Perry is working on a similar platform, called Gaikai. And privately held Otoy is working on a software solution that would accomplish the same goal.

What makes OnLive stand out is its founder—Steve Perlman—who previous led development on the technology behind QuickTime and founded WebTV. The company also has several high profile investors, including AT&T Media Holdings and Warner Bros.

Those are noteworthy backers, as both are tied directly to cable providers. (AT&T owns U-verse and Warner’s parent company owns Time Warner Cable.) And many think the real strength of OnLive—or any cloud-based gaming company—will be when and if it aligns with a television content provider, dramatically expanding its customer base.

“How people are being served games is changing,” says Colin Sebastian, an analyst with Lazard Capital Markets. “Anything that can incrementally get people to stay with an established cable or satellite service and keep paying a monthly fee would be embraced.”

The service isn’t without its hurdles, though. OnLive, which launches June 17, is untested in the open world. Still uncertain is whether games will be as responsive with subscribers as they are in controlled media demos. Many also wonder if they’ll be able to fully enjoy the service’s benefits with a typical broadband connection—or if they’ll need to pay more for faster service from their provider. And the monthly $14.95 service fee (which doesn’t include the price of games) could be offsetting to some as well.

In essence, games are becoming more accessible—but the price of admission might be too high for some. That means initially, the chief subscribers for cloud gaming are likely to be core gamers – who already have plenty of gaming options.

The potential, though, continues to turn heads. And while OnLive isn’t yet positioned to penetrate the mainstream market, independent publishers like Electronic Arts and Ubisoft are getting on board early, hoping to reach new customers in non-traditional ways.

“{OnLive’s success] depends on what content is available,” says Sebastian. “If the tech hurdles are surpassed, the convenience factor is there. So it’s all a matter of making sure you’ve got the right games.”