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OnLive Lives On Under Massive Restructuring Plan

By Peter Suciu
Aug 20, 2012 12:15 PM PT

The future of the cloud-based OnLive gaming service is looking cloudy indeed. On Monday the company confirmed that a restructuring plan will keep the streaming video game service operating. However, all staff members were let go in the process -- although some may eventually be rehired.

OnLive Lives On Under Massive Restructuring Plan

This followed the company's filing last week of an Assignment for Benefit of Creditors, which is an alternative bankruptcy. It allowed OnLive to relinquish its assets to an assignee.

Those assets have been sold to a new company. Additionally, under this filing, all previous OnLive shareholders, including employees and founder Steve Perlman, lost their respective stake in the company and all employees were laid off.

The newly formed company that acquired OnLive's assets will operate under the original name, continue to offer its services, and reportedly offer jobs to nearly half of those former employees. For now OnLive survives, but the question is, for how long?

"This was an interesting restructure, very creative in that the investors took the hit [and] the customers were kept whole," said Rob Enderle, principal analyst at the Enderle Group. "As far as risk, they are now in better financial shape than they were, so if you liked them before, you are actually safer now."

OnLive did not respond to our request for further details.

That's Life in the Clouds

Just weeks ago it looked as if OnLive could be a threat to the traditional console-based video game business, with its streaming service that could deliver games using a broadband connection. But life in the clouds wasn't to be, so what went wrong?

"If we look at it objectively, it comes down to the fact that OnLive has been ahead of the time," said Scott Steinberg, principal analyst for TechSavvy Global. "They have a great catalog but lack any big hits."

While the technology is there to deliver the games, the audience hasn't been Steinberg told TechNewsWorld.

"As a consumer service, it is still really a few years off," he added. "At the end of the day, the company just didn't make money, and while that isn't unusual, this time it could work to the company's advantage. Someone else is going to look to streamline and operate it lean and mean and turn it around."

OnLive Lives Again

If OnLive is to mount a do-over, it'll need to do it right. When Mario or Pitfall Harry encounter an obstacle they failed to get past the first time, they typically approach the second attempt by tackling it in a different matter. Will the new OnLive learn from the video game characters' methods? <,p> One solution to the problem maybe to look at alternatives to facing it head-on.

"The VC firm is unlikely to let them fail and will undoubtedly be looking for a buyer or taking the firm public again in the future, and they won't be able to do either if customers are lost," said Enderle. "You don't make this kind of investment, take this kind of risk if you think it won't pay off."

And in other video game analogy, it is back to the beginning, as there aren't exactly save points in business.

"OnLive has been returned to startup status, trimmed down, and it is now in turnaround/build mode again," Enderle added. "The process being used is actually a best practice -- even more aggressive than what Jobs did to turn Apple around."

Second Life

That new start could prove to be exactly what the company needed however. It could allow the industry to catch up with OnLive, which could have been truly ahead of the game.

"The company has been pursuing a business model that will prove directionally correct, but too early," said P.J. McNealy, chief consultant with Digital World Research. "The business models for video games in the next three to five years will have elements of what OnLive has been offering, but will be part of a hybrid service offering."

But there will still be obstacles along the way to get to the prize, just like those faced in video games. "At the end of the day, the biggest weakness for OnLive hasn't changed -- the last mile," emphasized McNealy. "They can't control the pipe to homes, so they are still limited for now."

However, OnLive had perhaps gotten a little too large and unmanageable as well. This restructuring could cut costs and perhaps make it the lean and mean company it needs to be.

"In the end, it is left in better shape this week than it was last, substantially better, and that is likely the big take away from this move," said Enderle. "This is all assuming that there won't be any significant litigation which can result from moves like this."

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