OnLive Blog

Steve Perlman and Mike McGarvey take questions from the audience at the OnLive press conference.

Hi, I’m Mike McGarvey, OnLive’s Chief Operating Officer, and I’m pleased to be making my first post to the OnLive Blog.

“Why OnLive and why now?” are two of the questions I’d like to explore as we unfold our strategy in the video games space. Due to a number of different factors, which I’ll outline in a moment, the currently available distribution methods for video games present extreme challenges for developers and publishers. This isn’t a new development by any means. For years, industry experts have been monitoring and predicting this outcome. OnLive addresses these challenges by evolving the current game distribution methodologies, establishing a direct channel between the game content and the consumer, thereby enabling a higher overall return on a lower back-end investment.

In many ways, the current quandary the video game industry faces was foreshadowed by the movie business: skyrocketing production costs, a narrow distribution pipeline and static retail prices. Movies got bigger and more expensive, but ticket prices and the methods of delivery did not evolve along with the costs. Video game publishers now find themselves in a similar situation.

While it may seem counterintuitive to question the business model of a thriving industry—it has been projected that video games sales will meet or exceed $60 billion in 2009—there are some fundamental flaws in the economics that we are aiming to address with OnLive.

First off, while the costs associated with video game development, distribution and marketing have increased exponentially over the last ten years, prices have remained static. The average multi-platform game now costs upwards of $30 million to produce and bring to market, but the retail price has remained fixed at approximately $60. That makes the return on investment much more challenging for publishers. Yes, demand is up, but the cost to develop has risen so dramatically that it’s become extremely difficult to break even on a new title, let alone make a profit. Other factors such as used game sales and piracy are also negatively impacting profit margins.

OnLive has the potential to change these dynamics by removing packaging and distribution costs. Because we’ve eliminated physical media and full downloads, there’s nothing to steal and nothing to resell, giving publishers complete control over their product. By providing a powerful end-to-end development-to-distribution model, OnLive can dramatically alter video game economics, increase profit margins and provide new and enhanced monetization channels. Not only does this increase revenue, but it also means that the money typically allocated for high distribution costs can be spent instead on design, development and marketing, leading to better overall product with greater awareness and a better value for the consumer.

So, while retail has been the mainstay for distribution of top video game titles since the industry’s inception, OnLive is now breaking that mold. We will be delivering the same top video games titles exclusively through broadband Internet, in the same release window they are available in retail, but with significant economic, convenience and feature benefits to both publishers and gamers. And, this is the main reason why OnLive won’t have a booth at E3 this year. More than anything, E3 is a retail-oriented conference, both for retail platforms and retail publishers, and OnLive is neither. You’ll hear and see plenty from us this year in the run up to our external Beta and launch, delivered directly to your home through your broadband connection.

In the meantime, I’ll be exploring video game economics in more detail throughout the year in future blogs. This is an exciting time in the game industry; we’re standing on the precipice of several monumental changes and improvements. I look forward to discussing them with you in this space as we move forward.

—Mike McGarvey, OnLive COO