Onlive: Apple Acquisition Edition
Last week, we heard the news of Onlive. The view of the company's potential really depends on the perspective of the viewer. The mainstream media, the rapture is upon us. The game industry is in a state of turmoil and publishers are fighting a losing battle here on earth while those who signed with Onlive are ascending to heaven, only to return in the 4th quarter when all other publishers died on the swords of their own hubris. The gaming press is looking at it the way a cat paws at a dead rat hoping it will jump up and start to play, all the time saying "so tell me again why this is better than Steam?" Either way, I just wish I had a piece of it because these guys are going to make a lot of money.
With Mike McGarvey involved, it is no surprise the company is a press juggernaut. In a former life, Mike, Dave Cox, Paul Baldwin, Sutton Trout and a handful of others launched Tomb Raider from a then two month old Eidos, generating a ton of press and instantly turning the company into the second largest publisher in the world. He is a smart guy who knows how to use the press to his advantage. It is also no surprise that the press sparked debates. GDC discussions and subsequent news reports were filled with debates over whether the thing would work. I am not smart enough to understand the tech or the arguments, but based on the folks involved, I believe it does what they say. Steve Perlman is a very smart guy with a track record of delivering on technology promises, and after years of working on this thing, he would not make an announcement if he could not back it up. The only question in my mind is whether there really is a problem to fit this solution.
Assuming the technology is solid, I still have concerns about the market. The service provides high quality PC games on demand to consumers. They lined up nine publishers and a ton of games, but are the people who don't have game consoles or access to Steam or Direct2drive on their PC's really clamoring to play Crysis. I mean, it is almost a tautology. If you want to play Crysis and have 5 megs down, you have a high end PC, a broadband connection and a game console or two. If you don't have that stuff, you probably don't even know what Crysis is. I know, I know, they have a lot of games and they only focused on Crysis to get our attention, but the games they have are all PC games. While the company is promoting the games as playable on a TV, most PC games don't translate well to TVs and most people don't play games on their PC. When it comes to the type of games being delivered by Onlove, the console game market dwarfs the PC. And again, is the person who is inclined to subscribe to a dedicated game service and has broadband next to their television really someone who does not already have a game console? You know, those things with a ton of downloadable content made for consoles and a ton more on the way. If I own a PC, why wouldn't I buy games through a progressive download service so I can use my VOIP phone or someone else can watch video while I am playing games in the other room?
But you see dear reader, thoughts like this come from the simple mind of a guy in the game business trying to figure out whether the service will be a success. This is the wrong way to look at the operation. This isn't about games. It is about high finance. The kind of stuff that makes Richard Garriott look like a pauper. When viewed from the correct perspective, it becomes obvious the service has achieved its first milestone and this Jesus Box is well on its way to spewing money from the heavens for the equity holders.
There is an old joke about a shipment of sardines. The story describes this single case of sardines moving from buyer to seller with a consistently escalating price. Finally, after a number of turns of the same case a potential buyer cracks open one of the packages and tastes one of the sardines.
"These taste like shit." the potential buyer says.
"Yeah, so." says the seller.
"Well why would I buy bad sardines."
"Idiot" says the seller. "These sardines aren't for eating, they are for buying and selling."
This Jesus Box is for buying and selling. When Steve Perlman created WebTv, he created a working technology, a patent portfolio and a set of strong strategic partners. He also created a news story which would give a lift to anyone who acquired it. The buyer was putting the internet in people's living rooms. Before anyone could tell whether consumers would buy in, Microsoft acquired the company for a big number. We saw the same thing with Massive Media. Anyone in the business who looked at the company saw the guys hand coding behind the facade of the great and powerful Oz. But for Microsoft, it told a story. The company had a pile of hard to get contracts with publishers, a semblance of technology, and a very nice story to tell about the growing world of in game advertising. The pattern isn't Microsoft, similar stories can be told about Yahoo's acquisition of Broadcast.com, Google's acquisition of Youtube, and hundreds of other mergers and strategic alliances. The pattern is buying into a story.
If we look at Onlive from the perspective of the game industry, it is a big question mark. If we look at it from the perspective of the rest of world, it looks pretty cool. There are no bandwidth, viability, consumer adoption or game quality concerns. Where we see another game box, they, like Newman looking at Kramer in the Butter Shave Episode, see a big tasty turkey dinner. The story is simple. This purchase puts a company in the hottest business on earth. To a cable company, hardware company, bandwidth provider or studio the company looks like a big stack of hard to get content deals wrapped with a bunch of blocking patents which could keep their competitors not only out of this space, but other spaces in which they operate. If they are a media company in anything other than games, their industry is down while the world is saying games are white hot. This thing is a story to shareholders waiting to be told.
When Apple was launching the iMac the company aggressively pursued publishers to commit to day and date release of their games on the Mac. They found out games were an important application and they had to have them for consumers. But with a market share of only 2% it didn't make sense to make sense for publishers to make the investment. You may remember, Steve Jobs responded to this issue in 1998 by announcing Connectix virtual game console. Sony sued and the thing was pulled from the market, but before that happened, Jobs was able to announce the arrival of over 350 games to the Mac platform. The entire PlayStation catalog was now available. Consumers who never intended to buy a game were more inclined to buy the iMac because they could buy games if they wanted to.
Let's take a look again at Apple. AppleTV and Xboxes are both trojan horses - hang in with me and you will see where I am going. The biggest difference is Microsoft put the trojans on the inside and Apple had them riding on the outside. The end goal for both is ownership of the set top and more specifically, the video distribution channel going into the set top. Microsoft got the box pulled in through games, Apple is doing it through video. Microsoft is way ahead - for now. It would cost Apple billions in R&D and years of product development to come close to the 360 on the game side - unless it pulls in a service like Onlive. If Apple acquired Onlive, they would immediately have a portfolio of games deliverable in a quality rivaling the 360. All of a sudden there a hd movies and tv shows delivered through iTunes, streaming video from sites like Hulu through Boxee and a portfolio of games rivaling those on the 360 at a fraction of the price. In one simple acquisition, Apple would get to the same point as Microsoft with a more elegant solution, less legwork on publisher deals and without spending billions of dollars in R&D. Does it work? Who cares. Sure they are still PC games on a television, but this story is being told to people without consoles. The appearance of a large selection of games is more important than the games themselves. It is like computer expandability. Everyone considers it during purchase, very few people actually ever expand a computer. Like all those people who only own Wii Sports, if they feel they have access to more games than a PS3, they will like it, even if they only ever play a handful. It is a great story and Apple is about stories. Was there really anything you could do with an iMac you could not do with any other PC? Can't you see the Apple ad with the continuous background "ca - ching" every time a game title goes up on screen for the 360 and one flat fee on the AppleTV? The system will be elegant, simple and usable. Would it make me throw my 360 away or buy an AppleTV? Hell no. But will it move high margin units of AppleTv and get them a nice rise in the stock price? Hell yes. If you really want to dip your toe into the deep sea of speculation, think about how an acquisition fits with this.
Apple isn't the only one who can benefit from this story. Warner who is already an investor, Comcast, Cisco, Logitech, Viacom and Newscorp are just some of the potential suitors who would benefit from the story. So if you think you would not buy this box, don't worry, they don't care. It's not for you anyways.