New OnLive service could turn the video game world upside down

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.

Perlman (right), a serial entrepreneur whose startup credits include WebTV and Mova, says his Palo Alto, Calif.-based company has developed a data compression technology and an accompanying online game service that allows game computation to be done in distant servers, rather than on game consoles or high-end computers. So rather than buying games at stores, gamers could play them across the network — without downloading them.

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Perlman first told me about his plans two years ago. But he managed to keep the whole project secret until today. OnLive plans to show the technology live on Tuesday night at the SF Museum of Modern Art. Over time, Perlman says the company will unveil more interesting projects, features, partners and investors.

“This is video gaming on demand, where we deliver the games as a service, not something on a disk or in hardware,” Perlman said. “Hardware is no longer the defining factor of the game experience.”

[update: See reaction to OnLive from the GDC here.]

A bunch of major game publishers are backing the idea, which is simple but hard to believe. If you compress game data so much that it can be sent instantaneously over the Internet, then you no longer have to compute that data in a game machine. You can compute the data in a very powerful Internet server and then send the results to be displayed in the home. That’s a pretty big earthquake in a $46 billion worldwide industry ruled by three hardware makers who sell powerful consoles.

The problem with this server-centric approach, which has been talked about for a long time, has always been that the computing power required to process a game has been growing by leaps and bounds, while the ability to compress data hasn’t been growing at nearly the same rate. By vastly improving compression and reducing the computing power required to do compression, Perlman has turned the situation around.

The concept was originally evangelized as the “telecosm” by George Gilder in the pre-bubble days of the 1990s. Gilder thought that the Internet would “hollow out” the PC, meaning that Intel and Microsoft would become less important because their products would become commoditized. If you could spread processing loads across broadband connections, that would obviate the need for a powerful PC in the home. That is, you could do a lot of computing in the centralized Internet server, pass that data over fast Internet pipes, and do very little processing in the client-side computer in the home. Back then, a lot of people felt Gilder was out of touch with reality. Larry Ellison, Oracle’s chief, tried selling a Network Computer, but it never got of the ground. The idea has now evolved into cloud computing.

As consumers began to demand data-heavy software such as video over the Internet or high-end games, people needed more powerful PCs. Fast computers in the home made up for relatively slow broadband connections. But Gilder’s idea could now make a comeback, thanks to OnLive’s ability to compress data 200-fold, as well as the fact that broadband is more pervasive and the demand for ever more powerful computers has stalled. (We know that last point is true in part because $400 Netbooks, which aren’t full-fledged laptops, are selling fast).

Last week, Perlman showed me a demo of the technology. He was playing Crysis, one of the most demanding 3-D shooting games ever made, running on a simple Mac laptop and also on a rudimentary game console, known as a micro-console, which does almost no computing but merely displays the images on a TV in either standard or 720p high-definition. The graphics ran smoothly.

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OnLive’s technology has the potential to move beyond games to the broader level that Gilder was talking about. It could eventually sweep through all forms of entertainment and applications, providing the missing link in helping the Internet take over our living rooms.

With OnLive, players can join each other in the same multiplayer game, regardless of whether they have a PC, Mac or OnLive’s own micro-console (a simple box with minimal processing power) connected to a TV. Such cross-platform game play usually isn’t possible.

Big game publishers and developers — Electronic Arts, THQ, Take-Two Interactive, Codemasters, Eidos, Atari, Warner Bros., Epic Games and Ubisoft — have agreed to distribute their games through the OnLive network, bypassing traditional retail game sales in an effort to reach people who don’t buy game consoles or expensive game computers.

To address naysayers who think this can’t be done, given all of the Internet’s trade-offs, OnLive will show 16 games being played live on the floor of the Game Developers Conference this week in San Francisco. The game service is expected to be available before the end of the year. If this sounds to you like the interactive TV hogwash of the 1990s, like Time Warner’s Full Service Network, it is indeed very similar. The difference this time is that this looks like the real thing.

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Cool game services

In the live demo, Perlman showed me how the user interface is built around a grid of clickable windows, with any one of them running video clips as previews for what’s behind the window. You can select a window to play a particular game or watch a demo. After  playing a game, you can share video with players of the most interesting sequence in your game in a window dubbed “Brag clip.” You can also be a spectator and watch how the most skillful players in the rankings play the game. Or you can chat via voice headset with your friends.

Versions of these social features are available in a few games now. Halo 3, for instance, had the “Brag Up” feature built in. But with OnLive, every game can have these features. OnLive plans to charge users a monthly subscription fee, much like Microsoft charges for its Xbox Live online service. The company can also save publishers a lot of money and share in some of the extra profits.

“OnLive . . . will be very well received in the marketplace and it is a good fit with our strategy of bringing our games to consumers on the format of their choice,” said Kevin Tsujihara, President, Warner Bros. Home Entertainment Group, in a statement. The top executives of THQ, Ubisoft, and Take-Two Interactive offered similar praise for the service.

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Will you ever have to buy a new game console and computer upgrades?

Mike McGarvey, (top photo, left) chief operating officer of OnLive, said the new technology “breaks the console cycle where a gamer has to buy a new machine every few years.” If this happens, the obvious losers are Microsoft, Sony and Nintendo.

Beyond console makers, makers of PCs and high-end chips will be affected. The micro-console is so simple it has a custom chip but very little else. It is a lightweight box that has a universal serial bus (USB) power connector, a high-definition multimedia interface (HDMI) connector to hook up with a TV, and an Ethernet jack for a broadband connection. You can plug a standard PC game controller or computer mouse into it.

Losers would include the makers of high-end chips such as Intel, Advanced Micro Devices and Nvidia. However, Perlman noted that Nvidia will benefit to a degree because OnLive’s data centers use high-end graphics chips in their servers. Nvidia has been a development partner in helping to create the server technology.

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How does it work?

The secret sauce in OnLive’s technology is its compression algorithms. On the home device, the only software component OnLive needs is a one-megabyte plug-in for a standard Internet browser. That code is enough to decompress the data and display it. Normally, decompression takes much more hardware.

Perlman hasn’t said much about exactly how it works. One clue: the algorithms change the structure and order of Internet data, or packets, so they can sail through the Internet. A packet can make an entire round trip in 80 milliseconds, a very short amount of time compared to other Internet traffic that travels through hardware that either compresses or decompresses the data.

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A lot of people have chased after the Holy Grail of games delivered and played via the internet. But they have been stymied either by slow computing power or by broadband choke points. Infinium Labs promised something similar years ago with its Phantom gaming console, but the company failed. Trion World Network chief executive Lars Buttler has talked about doing server-based games, but it isn’t clear if Trion — which hasn’t described its technical details — has the same kind of technology OnLive has demonstrated. Trion is building its own games, while OnLive is building a platform for all game makers instead. On Monday, Denis Dyack predicted that cloud computing games are just around the corner, even though he didn’t know about OnLive.

Sony enabled the entire base of PlayStation 3s to be used in Stanford University’s Folding@Home project, which takes the spare processing power of connected PS 3s and uses them collectively to solve tough scientific problems. But Sony didn’t have the compression technology that OnLive uses to effectively send a lot of data over a broadband connection at very fast rates. So while Sony had the same idea, it didn’t have the means to do what OnLive can do.

To use OnLive, all you need is a broadband connection running at two megabits a second for standard graphics or five megabits a second for high-definition graphics. Those data rates are well within the speeds of most broadband connections. (One report said 71 percent of U.S. homes have two-megabit per second or faster Internet connections). The compression is so good that players can play games even if their homes are as much as 1,000 miles away from the server. For now, OnLive needs only five data center locations to be able to cover the entire country.

Of course, there are some limitations. The technology isn’t quite good enough to be able to do 1080p resolution, which is the highest available on game consoles and TVs. That’s because it would require broadband speeds of up to 10 megabits per second. Countries such as Japan have those speeds, but you have to pay a premium for that kind of service in the U.S.

Fighting game piracy and enabling episodic updates

One nice side-effect of OnLive’s service for game publishers and developers is that it promises to cut down on piracy. Since there’s no call for users to download games to their computer or console, there’s nothing to copy or steal. Gamers simply buy a subscription or rent a game online. McGarvey estimated that currently for every $60 game sold, game piracy results in $12 in lost revenues for the publisher or developer.

Game publishers could also frequently update their games on OnLive by changing the code running on the servers. If one part of a game is too hard, the publishers can simply patch that part and then everyone  will play the new version the next time they log in. Publishers can also pull the plug on games that aren’t selling well without taking a big inventory hit. And they can add new episodes of popular games quickly, much like the TV networks cancel unpopular shows and add episodes for successful pilots.

Effects on retailers

Retailers and purveyors of used games could be cut out of the picture entirely.

Typically, a game publisher keeps only about $27 for every $60 game sold. Retailers keep $15 and then keep all of the revenues when a used game is resold. About $7 goes to the game console owner. Services such as Valve’s Steam cut out the retailer via digital distribution, but it requires powerful computers, fast connections, and lots of download time. McGarvey said that OnLive will dis-intermediate retail. He said that while OnLive will take a cut of what users pay for games on the service, it saves publishers so much money that it can help the game creators raise their profits dramatically.

OnLive’s history

OnLive has been in stealth mode for seven years. I first learned about it two years ago and have been anxiously waiting to see whether the company pulls of its mission. Perlman said it took a lot of work to get the technology done, but almost everyone he has shown it to has jumped aboard as a partner. The company has received funding from Warner Bros., Maverick Capital and Autodesk.

Perlman scored big when he sold WebTV, an early Internet appliance, to Microsoft in 1997 for $425 million. He went on to found Rearden, a startup incubator (named after the Hank Rearden character in the Ayn Rand novel Atlas Shrugged) that did deep research and development. His goal was to do the kind of long-term research that venture capitalists and even big companies have shied away from.

He worked on a set-top box dubbed Moxi and sold that to Paul Allen’s Vulcan Ventures. Then he created Mova, which captures human faces with imaging technology so they can easily be turned into animated faces in movies or video games. Mova is now a subsidiary of OnLive, which spun out of Rearden in January, 2007. Mova’s facial animation technology was behind the aging of Brad Pitt in the Oscar-winning film The Curious Case of Benjamin Button. At that point in the development, Perlman was convinced the technology would work.

The company had to do a lot of fundamental work, resulting in more than 100 patents or patent applications. The patent filings amounted to more than 5,000 pages, Perlman said. The company also hired more than 100 people and acquired top talent, including Tom Paquin, executive vice president of engineering and the former engineering head at Netscape. McGarvey also spent 12 years in the video game industry, most recently as chief executive of Eidos, which he sold in 2005.

It may seem hard to believe. But I’ve seen it work. Perlman’s got a good track record. He has invested heavily, as have some very big media companies. The game publishers are behind him. And he’s showing off 16 working games this week. Perlman has a grand plan. But the little pieces of it that he has already shown are going to turn the game industry, and perhaps everything else, upside down.