Small Ideas

Finding the next big idea by exploring small ones – by Rishi Khaitan

OnLive Launching June 17th

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OnLive is one of the most exciting startup launches of 2010. Why? Well, OnLive is trying to disrupt the video game industry. Here’s a description of OnLive from their recent blog post announcing the launch:

OnLive fundamentally transforms the way users experience games and interact with each other, and in time, will transform the way games are developed and marketed. By distilling specialized game hardware out of the equation, OnLive will allow games to be played as a pure media experience on virtually any device, with the same flexibility and instant-play experience that we’ve come to expect from online video and music.

You might be thinking that any company description which has the word “transform” twice in the first sentence is likely BS. So, for a more in-depth, tangible description and demo of OnLIve, I would HIGHLY recommend you watch this presentation by CEO Steve Perlman (Quicktime, WebTV) from the 2010 Dice Summit:

Game TrailersE3 2010

Even if you aren’t interested in the video gaming industry nor OnLIve, the first few minutes of Steve’s talk is very interesting. He basically runs through the evolution of media consumption. One interesting stat that’s really stuck in my head is that torrent traffic, while still representing a huge (think 50%) chunk of total internet bandwidth worldwide, actually peaked last year and is now on the decline! Steve says it’s largely because people are growing impatient. They want their media now and thus are preferring streaming/on-demand experiences.

Since their first emergence out of stealth mode at GDC ’09, the chatter about OnLive seems to be slowly shifting past “wait, does this thing actually work?” to “great, so how much will this cost?”. And it is indeed the pricing issue that is one of the most intriguing aspects about OnLive. Well, as of last week’s announcement at GDC ’10, we have the least part of it.

OnLive will charge a monthly fee of $14.95 for access to the service. This does include access to game demos and other media bits (think PSN or XBox Live), however, this does not include any actual games. Access to games will be available for rent or for sale on an a la carte basis.

So, let’s run some quick numbers:

OnLive costs 14.95/month x 12 months/year – 10% multi-month discount = $160/year

Gamefly costs $16/mo (1 game at a time) x 12 months/year = $200/year

A PS3 costs $300 and let’s say at this point has a 4 year lifetime so amortized is $75/year

So how much will games be on OnLive?  If you take a look at about the 34:30 minute mark in the above video, Perlman shows a graph of which players in the value chain get what margin of a $60 video game. In that graph, the publisher gets around $27. Perlman contrasts this with the OnLive model where his graph appears to show that OnLive is offering about a 70% publisher /30% OnLive split to developers. At that split, OnLive needs to charge about $40 per game for publishers to make at least $27/game sold. (It’s probably also worth noting that publishers also win because that game, because it’s digitally delivered, cannot be resold on the used game market nor can be pirated.)

So, let’s see..

Scenario A: Consumer owns PS3 and rents 1 game/month. Using PS3 + Gamefly that will cost 75+200=275/year. Using OnLive that would be 160+rentalpricex12. Do some simple math and rentalprice needs to be about $10 to equal the PS3+Gamefly scenario.

Scenario B: Consumer owns PS3 and buys 4 games/year (assume $60/ea). Cost of that is 75+60×4= $315. Using OnLive that in my estimate would be 160+45×4 = $340. To make the prices comparable the game purchase price on OnLive would need to be under $40.

Of course I haven’t discussed other advantages to the consumer such as being able to play any game regardless of platform. On the other hand, for gamers that already own a current-gen console, the cost of the console is a sunk cost and thus the argument for OnLive becomes more difficult. A pricing scheme that is interesting to think about is usage-based. In other words, gamers are charged per hour that they play any given game. However, I can imagine that might be a tough sell to publishers because, let’s face it, they are capturing a lot of consumer surplus from gamers who buy a game and never end up playing it much or at all.

Finally, though, OnLive does more than just enable streaming gaming. It adds a social dimension to gameplay that PSN/XboxLive haven’t fully been able to do. One example is brag clips (highlighted in the video above). I look forward to checking out the OnLive SDK to see what types of functionality game developers may be able to leverage.

To signup for a free 3-month launch membership to OnLive, signup here.  Whether OnLive is a success or not, the OnLive service represents a major milestone for all media.  OnLive proves that even the most complex media experiences (HD online multiplayer video gaming) can be delivered via a stream.  We all knew that the the disc was dead.  Well now it looks like the download is also dead.

Written by Rishi Khaitan

March 13th, 2010 at 8:46 pm

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