OnLive’s Radical Restructuring
AUG. 20, 2012 • Cloud gaming service OnLive Inc. invoked a little known California process similar to bankruptcy called Assignment for the Benefit of Creditors (ABC) on the 17th. ABC is used by companies to sell their assets more swiftly than in a typical bankruptcy in order to pay creditors more promptly. In OnLive’s case, all assets were sold for an undisclosed amount to Gary Lauder who runs technology investment fund Lauder Partners. In the process all staff were laid off and all stockholders and investors immediately found their holdings wiped out. For smartphone maker HTC Corp. in Taiwan that means taking a $40 million write-off on its investment in OnLive. Lauder is now OnLive’s sole investor as the service attempts to continue service uninterrupted. Close to half of the laid off employees were offered new positions in the second incarnation of OnLive, and many of the others were being approached for contract work. What remains unanswered is how OnLive’s principal financial woe is being addressed. As reported by the IDG News Service and other news services, OnLive’s founder and CEO Steve Perlman was quoted as noting that OnLive had secured three-year leases on 8,000 servers, plus the network support necessary for those servers. The cost of that capacity far outstripped the less than 2,000 average concurrent users OnLive had at any given time.
Impact: OnLive was a big bet on a new technology that is clearly before its time. There were many issues with OnLive including 1) getting the technology to work; 2) getting consumers to care and 3) building a business model to pay for it. OnLive struggled with all these issues but in the end it was simply running out of the $56 million or so in investment funding that forced the issue. Of course, if Perlman’s statement is true, and OnLive was operating with four servers per active paying user there are major business model issues that most likely was a major drain on cash and also made OnLive pretty unattractive to any potential purchasers. To bring a service like OnLive fully to market would be like launching a console system and would really need a budget in the hundreds of millions of dollars, if not billions. The bet now seems to be that OnLive may have some technology that is salvageable to the right buyer. Clearly there will be a cutback on service and a focus on making the company attractive to potential purchasers. Of course, by eliminating all that overhead plus clearing the slate of current investors, OnLive immediately becomes more attractive to other potential purchasers. One thing that OnLive does highlight is the meaningless of companies that throw about subscriber numbers. OnLive had been talking about 1.5 million active users and 2.5 million subscribers. Our bet on reading between the numbers is that because it was free to become an OnLive subscriber getting 2.5 million signups was no problem. The issue became how many of those users were generating revenue versus acting as a suck on servers as they played free demos. We think Perlman was referring to the number of paying users they had when he talked about having to support less than 2,000 active users at a given time. That would mean OnLive probably had about 20,000 to 30,000 users actually paying in any given month and thus was clearly a non-starter in its current incarnation.