DeanBeat/OnLive

The always-insightful Dean Takahashi wrote a long piece on The DeanBeat yesterday about the fall of OnLive. As the Series A investor in one of OnLive’s rivals, Gaikai, I was a pretty active observer of OnLive and of the cloud gaming market generally. I think Dean provides a thorough – if somewhat gentle – overview of the facts of OnLive’s collapse and his piece is totally worth reading.

That said, I want to take issue with two often-repeated conclusions that appear in Dean’s piece (and others) drawn from the OnLive fiasco. The first, more narrow one is that “OnLive failed because it was too early for cloud gaming.” I think this is nonsense. In my opinion, OnLive failed for three reasons, none of which include being “too early”:

1. OnLive chose a consumer-facing, “console in the cloud” strategy that initially required customers to pay a subscription at a time when subscriptions were going out of favor in gaming under pressure from free-to-play models (they later went free for demos but paid for premium games) and which required publishers to pay a platform tax and let OnLive own the customer relationship. Normally, publishers will only consent to this kind of enforced aggregation and high tax when they are getting something meaningful in exchange that they couldn’t get elsewhere (access to closed iOS devices, or to Facebook’s billion eyeballs, for example). Contrast this with Gaikai, who offered publishers the cloud platform as a metered service, and let them determine how they wanted to monetize their customers, if at all.
2. In order to be a viable consumer-facing business, and satisfy the implied and explicit quality of service promises that they were making to customers, OnLive had to over-build the network in advance of proven demand. This put tremendous strain on their treasury – cloud gaming can be a capital-intensive business during the network build-out. To me, this reads as “too aggressive” not “too early.”
3. OnLive’s CEO, Steve Perlman, was a relentless and extremely successful fundraiser. He was able to raise more money at higher valuations than any other company in the space. Unfortunately, that success was a double-edged sword, as he had raised money from investors at valuations which far exceeded the short-term M&A value of his company. He couldn’t salvage OnLive in a sale for a modest premium to the price Sony acquired Gaikai, for example, because he had raised money at two and half times that value. Perhaps high-valuation fundraising would have made sense long-term as an equity preservation strategy for founders and employees, but it severely compromised OnLive’s ability to maneuver short-term.

The second conclusion that Dean makes is that the OnLive collapse will have a chilling effect on investments in games companies. “The rest of the game industry may suffer along with OnLive, particularly if funding for daring ventures dries up,” he writes. He then tries to connect the dots between OnLive, 38 Studios’ bankruptcy, and Zynga’s recent poor stock performance. I think that’s a stretch.

Without question these are unfortunate events for the games business. But, by analogy, no reasonable person looks at the troubles at Nokia, RIM and Palm and thinks that mobile is a bad place to invest. Instead, they look at the management decisions, governance and strategic choices made by those companies and see them for what they are. The overall momentum in games, like in mobile, is bigger and more powerful than the foibles of any particular company, and certainly not a general indictment of “daring ventures” in the gaming space.