Is cloud gaming service OnLive really worth $1.8B? (poll)

OnLive’s $40 million in funding from HTC yesterday has everyone in the game business wondering what the company’s overall valuation might be.

One expert we asked came up with an estimate of $1.8 billion for the cloud gaming service startup. That would make OnLive one of the most valuable game industry startups around. Although few people grasp the company’s strategic importance, the valuation is plausible, given the potential for disruption that OnLive can cause to the entire video game industry.

So how plausible is that $1.8 billion figure? Justin Byers at VCExperts specializes in examining private company filings. Based on a recent filing that could be related to the HTC deal, Byers said that OnLive authorized the issuance of 8 million shares of Series E preferred stock at $7.50 a share (that price is the same as what HTC said it paid). The total authorized shares are now 358.4 million, while the total number of common shares authorized are 240 million. If all of the authorized common shares were issued, then the value comes out to $1. 8 billion.

“We are not saying that is the valuation,” Byers said. “We are saying it could be that high.”

The open question is whether the Jan. 31 OnLive filing relates directly to HTC. In HTC’s filing with the Taiwan Stock Exchange, HTC said that it paid $7.50 a share to buy 5.33 million shares of privately held OnLive. HTC said the value of the deal was $40 million, but it didn’t say what percentage of OnLive it owns. If it had, the calculation would be easy.

But we have some evidence to suggest that $1.8 billion is correct. Last year, both Belgacom and British Telecommunications each paid $7.50 a share for 2.6 percent stakes each in OnLive. At the time, Onlive issued 8 million new preferred shares of its private stock and said that its total shares outstanding were 342 million. At that time, Byers calculated that OnLive’s valuation was either $1.1 billion or $2.2 billion.

If OnLive’s value went from $1.1 billion to $1.8 billion, that’s a huge swing. But it’s not so great if it went from $2.2 billion to $1.8 billion. In any case, OnLive’s valuation could very well be pretty big, even though, as a company, it’s not on everybody’s radar.

The HTC announcement is a huge boost for server-based gaming, which promises to disrupt traditional game retailers and game consoles. It also shows that it will be possible to play the highest-quality games on mobile devices.

OnLive is engaged in a huge expansion onto many different platforms for its games on demand service. The company launched on the PC in June, spread to the TV screen via a MicroConsole adapter in December, and announced it would be built into Vizio TVs in January. Now the company says its games on demand will be available on HTC phones, specifically the HTC EVO.

Palo Alto, Calif.-based OnLive was founded by serial entrepreneur Steve Perlman. He invested in the technology for nine years before launching the service last year using internet cloud technology.

OnLive offers instant gratification with its games-on-demand service. Users log into OnLive and immediately play games that are computed and stored on OnLive’s data centers. Users don’t have to download anything and don’t need a high-end computer to play high-end games. So far, OnLive has been offering a la carte game sales and game rentals. Since OnLive focuses on digital distribution of games, it can disrupt retailers such as GameStop and put more profits in the hands of game publishers.

OnLive’s other investors include Warner Bros., Autodesk, Maverick Capital, AT&T, British Telecommunications and The Belgacom Group. The company was founded nine years ago and has more than 200 employees. (Note: we’re still looking for direct links for the filings and will update this post as we get them).

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