Apple + OnLive?

Big software companies like Google, Microsoft, Apple and even Facebook have a ton of cash on their balance sheet. Whenever investors start pressuring them to dividend some of that cash to shareholders, the ready answer is always that they’re hanging on to it to facilitate major acquisitions. Steve Jobs said recently justified his $51B cash pile by speaking to the possibility of strategic acquisitions.

Here’s an idea: Apple should buy OnLive. If you’re not familiar with it, OnLive was founded by Steve Pearlman, the guy behind WebTV (acquired by Microsoft) and Moxi (acquired by Paul Allen’s Digeo) and a key figure behind General Magic. (IPO in 1995). OnLive offers it’s customers the chance to play cutting edge games on relatively low end hardware without installation by running the game in the cloud. The user software decodes a streaming video of the game action and sends the user input back up to the cloud. The original announcement was met largely with derision, claiming that round trip times would render the games unplayable.  That talk has since faded with the launch of the service. Clever engineering and placement of servers at the edge of the network have yielded a completely playable product. Users don’t need modern hardware or to install games, they are immediately playable and booted on-demand in the cloud.

Although the game selection is currently somewhat limited the service has several characteristics likely to be attractive to publishers: Complete immunity from piracy, reduced revenue erosion from the used game market and zero distribution costs. Time-based “PlayPasses” and unlimited subscriptions for older games offer a price-point for everyone.

OnLive recently introduced a “MicroConsole” for $99. Since all it needs to do is decode video and stream USB input back up to the cloud, the hardware is cheap. As games improve and require more sophisticated hardware, consumers will not need to upgrade – all the upgrades happen in the cloud and only for the games that require it. A parent faced with a Microsoft or Sony console in the $300 range or a $99 console from OnLive with games of similar quality will have an easy decision.

Question: Which company totally dominates mobile gaming? If you answered Nintendo or Sony, you’re a few years out of date. The answer is Apple. The iPhone and iPod touch enjoy huge penetration, a massive library and an easy payment mechanism. Steve Jobs recently claimed that Apple owns 50% of the mobile gaming market. (A figure disputed by Nintendo.)

However in the “living room game market” (what we once might have called the “console game market”), Apple has no solution at all. In theory, they could do what Microsoft did, burning billions of dollars making custom hardware, but why would they? Apple already introduced an inexpensive living room device that decodes video and retails for $99. It’s called the AppleTV. Customers rent videos through the device and stream them over the net. 10s of millions of customers already purchase games and other digital goods from Apple for their iPhone and iPod Touch. Adding games to AppleTV would only require the addition of USB ports or wireless. Certainly OnLive is going to make the move in the other direction – the console controller conspicuously sports video controls even though OnLive doesn’t currently offer video.

Might Apple try to just build something like OnLive themselves? Sure. But OnLive has built some seriously impressive technology, including tough-to-duplicate leases for space at the network edges, not to mention some fearsome looking IP.

Another interesting tidbit: Steve Pearlman’s employer from 1985-1990? Apple Computer.

Credit: Christian Romming, a co-worker of mine helped develop a number of the ideas above.