OnLive woes show challenges of cloud startups

It was a long weekend for California-based cloud video games firm OnLive, and not the good kind.

On Friday, an e-mail went out to all the employees at the firm were told they’d been laid off. Since 2009, OnLive has been offering video gaming as a service – instead of players installing a game to their PC or playing from a disc in their Xbox, they connect to OnLive’s data centres which host the games and push low the low latency video feed back to the end user’s screen of choice. Users pay a monthly fee to access the service (which hadn’t been launched in Canada) and save on expensive video game consoles, hardware components, and the cost of individual games.

OnLive’s service delivers video games to Internet-connected devices.

Yesterday, Forbes reported that an affiliate of Lauder Partners had made an investment to acquire OnLive and will keep on half the staff (about 75-100 people) at their current salaries. So current users of the service shouldn’t see any disruption. But what was the problem that caused OnLive to require a financial bailout to stay afloat? It was all about scale.

One of the attractive features of a cloud service is that users can use them to scale up as needed without any extra capital outlay. If one day your e-commerce business is suddenly flooded with new customers, you just order more capacity from your cloud provider and you’re ready to go – no need to buy extra servers and install them. But it’s a different problem when your company is the cloud provider and you’re trying to keep pace with a growing user base without overspending on unneeded capacity.

That’s what did in OnLive, according to what CEO Ron Perlman told his employees. OnLive was stuck with server contracts and maintaining servers that weren’t being used. In a FAQ released to the press, OnLive claims to have 2.5 million subscribers, but an active user base of just 1.5 million. So that’s 1 million users the service has to be ready to handle if they all get an itch to play Halo one day, but most of the time OnLive is just paying to keep those servers warm.

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