Saturday, 18 August 2012

OnLive Acquired by a Newly-Formed Company Backed by Substantial Funding and will Continue to Operate

First the official statement by OnLive.

We can now confirm that the assets of OnLive, Inc. have been acquired into a newly-formed company and is backed by substantial funding, and which will continue to operate the OnLive Game and Desktop services, as well as support all of OnLive's apps and devices, as well as game, productivity and enterprise partnerships. The new company is hiring a large percentage of OnLive, Inc.'s staff across all departments and plans to continue to hire substantially more people, including additional OnLive employees. All previously announced products and services, including those in the works, will continue and there is no expected interruption of any OnLive services.

We apologize that we were unable to comment on this transaction until it completed, and were limited to reporting on news related to OnLive's businesses. Now that the transaction is complete, we are able to make this statement.

The rumor mill is spinning wildly about what is going on at OnLive. Their official statement only confirms that their assets have been acquired by a newly-formed company that is backed by substantial funding, and they will operate on and hire back many employees and hire even more people. But who is the owner of this newly-formed company we can only guess.

Joystiq's sources had some interesting things to say, though we have to take this information with a grain of salt as it's coming from disgruntled and shocked employees who were just fired.

Apparently the company filled ABC (Assignment for the Benefit of Creditors) bankruptcy and laid-off most of their around 200 employees. Employees that remained included management and select members of the operations and engineering teams required to keep the service moving forward. ABC is a faster alternative to bankruptcy that doesn't involve the courts, it allows OnLive to deal with some of the issues it was facing, most notably an oversupply of servers for the number of users it had signed up as sources have revealed that OnLive only has an average peak amount of 1,800 concurrent users, though millions have signed up for an account.

It looks like the new owner wants a ballast free company, therefore the ABC bankruptcy. The ABC process allows OnLive to be unshackled from the expensive server contracts and bring in a new source of venture capital. It looks like the employees were also a major cost. Beyond the loss of jobs, it turns out the stock they owned was in a company that no longer exists. Their benefits will end after August, however there are offers of contracts to answer questions about important topics like how are things at OnLive in exchange for special form stock in the new venture.

Joystiq reported information from sources on how this all went down at OnLive when OnLive Founder and CEO Steve Perlman explained all this to employees. Steve said he was very, very sorry and shouldered all the blame at the company meeting. This source also said that Steve has always worked harder than anyone at OnLive and therefore has his respect as well as many others within the company.

Later Joystiq published another article with more detailed information from a source about what Steve had to say at the meeting. He said, "I've been a non-stop fundraising machine. And I finally got to the point where I just could not bring in enough funding to carry this thing forward." The around 200 employees including OnLive Founder and CEO Steve Perlman were relieved of their positions in yesterday's meeting. "All of us, technically, as of today, our jobs have ended – our current jobs with this company," another administrator informed the crowd after Perlman finished speaking.

OnLive is entering what is known in California as an "Assignment for the Benefit of Creditors," or an "ABC," (a form of bankruptcy) wherein an "assignee" (a person, persons, or entity) takes over the assets of the current company – in OnLive's case, this means "the software, hardware, network architecture, our logo, all that stuff," according to Perlman – in an effort to lighten the previous company's debts and get its creditors paid off. Thus the "Benefit of Creditors" part of that acronym.

Perlman didn't say who that assignee was during the company's meeting, only referring to him as "an extraordinary guy" (not an entity), and a "very accomplished and well known venture capitalist" who is "very wealthy." The unknown assignee apparently believes that OnLive "is the entire future of everything," Perlman told employees. Unfortunately, he isn't wealthy enough to bring on the 150-200 people that OnLive employed.

"Here's the tough part, and this is the thing I'm very sorry to say: it's just not possible for one individual in a startup – whether it's that old startup or this new startup – to bring in this many people into a company," Perlman said. Without giving numbers, Perlman said that, in the new company, "the people that come on board are the essential people, as needed, to go and accomplish that goal of getting this thing to cash-flow positive."

He prefaced that news with a stinging reality: "The people that are gonna be coming on board here, that will come out of the group ... I'm gonna tell you, most of the people will not be coming on board."

So, what caused the sudden implosion of the gaming industry's most successful consumer-facing cloud streaming service? In so many words: scale. "There's no way to exactly estimate how many servers we'd need. So we literally bought thousands of them, and all the equipment and networks to go with it," Perlman told employees. Those servers, he said, came with lengthy contracts – contracts that tied OnLive's capital up in maintaining servers that few (if any) users were actually using. "If you've got 8,000 servers and 1,600 users, how could we ever get to cash flow positive, right?" Perlman rhetorically asked employees during the meeting.

Could the overscaling of server numbers have something to do with the fact that they thought they would have the OnLive App on the iPad since December and simply calculated in the huge number of iPad users. It's very dangerous to count on Apple, sometimes Apple screws you without even noticing it. They could have also calculated a faster expansion on Smart TVs and so on, and so on... It's very hard to predict the numbers when you have so many variables. Just imagine the other extreme if many of these partnerships would have gone through faster and OnLive had less servers, then another shitstorm would break out as they would have way less servers than needed.

Beyond the servers, Perlman said the company "dramatically expanded the number of employees" during its past few years. And during those years, it never downscaled to account for its lacking user base. "We made it through the whole recession without any disconnects, any layoffs, or any down rounds," Perlman boasted toward the end of the meeting.

Perlman expressed regret several times during the speech. He even directly accepted blame for the whole mess. "I'm the one that brought you here. I'm the one that ultimately made decisions. And I'm the one that ultimately takes responsibility. So I am sorry, and it didn't end up exactly as we'd hoped," he said.

Sources say that multiple offers were made to purchase OnLive over the last few months, including one from Hewlett-Packard. Company management said it was investigating offers; however, it was widely known to employees that Perlman was looking for an offer in the range of $1 billion.

Sources also say that OnLive Founder and CEO Steve Perlman wants to protect his cloud gaming patents and go to court against Sony and their acquisition, cloud gaming company Gaikai. This claim is somewhat contradicting to Steve's statements that he isn't interested in enforcing his cloud gaming patents and suing cloud gaming competitors as he wants cloud gaming to prosper.

Though the new owner of OnLive has yet to be revealed, sources say the new investor appears to be a wealthy individual "impressed" with what OnLive has been able to accomplish and not a major company – this according to Perlman during an internal announcement meeting. Could Gary Lauder, a venture capitalist who runs Lauder Partners be that wealthy, extraordinary, very accomplished and well known venture capitalist? Mercury News reports that they were told by a former OnLive executive, who asked not to be named, that Lauder is among those providing the new funding. Lauder had previously invested in OnLive. It could very well be that he is the one, as he shares the same views as Steve Perlman on the passed America Invents Act, so they might very well be good friends.

Of course one could speculate that the new wealthy owner is the old wealthy owner, so Steve Perlman himself or a connection of his, which could include Gary Lauder. He simply paid the hefty sum of $1 to restructure OnLive into a new lean and mean company.

Perhaps OnLive will re-emerge healthier after this stunt, but the PR damage and most importantly the damage done to the little trust that gamers had in OnLive and cloud gaming to date, could harm OnLive irreparably in the coming months. Based on the various reports around the net I'd say that their investor is maybe not wealthy enough. And it could well happen that this investor might get scared by this backlash of media and gamers, and simply liquidate OnLive or try to sell it to a large company.

I don't think that Sony, their purchase Gaikai and other players in the cloud gaming arena can be happy with what happened to OnLive, regardless of the distasteful tweet by David Perry. Now they will have even more problems getting investments, earning the trust of publishers and developers, and most importantly the trust of gamers.

Based on what the sources say that Steve declined many buyout offers by large companies one could say that he is a hard worker able to develop outstanding technology, but very headstrong when it comes to business decisions which has often put pain to his startup companies. His actions do resemble those of Hank Rearden, one of the main protagonists of Steve's favourite book Atlas Shrugged, the novel by Ayn Rand. After all he did name his Rearden technology incubator that has given birth to OnLive after Hank Rearden's company Rearden Steel.

I have to admit I like such people like Steve Perlman who risk destroying their creation, their baby, to follow their dreams, though they often fail. What I dislike are people without a backbone who slur around on how they are the best and throw dirt at others wherever they can. I guess I'm out of place in capitalism.

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