This Cloud Company Will Kill 5 Stocks You Love

OnLive is no longer fanboy vaporware. The company that turned heads nearly a year ago when it introduced its promising concept for console-free gaming is set to launch in three months.

Come June 17, subscribers will be able to pay $14.99 a month to play top-shelf games on their computers, served on the fly from OnLive's servers. In other words, it's cloud computing for the gaming crowd.

Eliminating console hardware and physical software from the equation, OnLive's success would be bad news for game-rental service GameFly, specialty retailer GameStop (NYSE: GME  ) , and console makers Microsoft (Nasdaq: MSFT  ) , Sony (NYSE: SNE  ) , and Nintendo (OTCBB: NTDOY.PK).

Sure, OnLive is a computer-based service. Folks playing on PCs and Macs aren't often the same breed of gamer as those pounding their console controllers. However, OnLive also will offer a set-top box for gameplay on TVs in the months following its launch. Since consoles' Xbox Live and PlayStation Network services already rely on Internet connections, this should be an easy sell.

So let's go over the losers again:

  • GameFly -- which filed to go public last month -- offers a more expensive service that is bogged down with physical delivery logistics and a lack of variety when it comes to instant gratification.
  • GameStop will suffer if folks take to the subscriber model. They won't need to buy new games, and they certainly won't be trading in the games they didn't have to buy.
  • Xbox, PS3, and Wii systems will naturally suffer if the migration is for real.

I didn't mention the video-game publishers and developers, because they're on board with OnLive. Take Two Interactive (Nasdaq: TTWO  ) , Electronic Arts (Nasdaq: ERTS  ) , and THQ (Nasdaq: THQI  ) are just some of the studios that will be putting out games through OnLive.

Why not? Instead of dealing with costly disc manufacturing, packaging, and bracing for returns, they just let OnLive's cloud handle the fulfillment. Instead of GameStop's high-margin resale business, which eats into the software makers' profits by denying them a cut when their titles subsequently change hands, the studios can collect a piece of the action indefinitely. (In addition to the monthly subscription fee, players will have to pay separately to purchase or rent each individual game.)

There's always a chance that OnLive and the consoles can coexist. Valve's Steam has been around for years, and its digital downloads haven't dented the rest of the industry. Gamers who enjoy titles through OnLive may decide to just buy them for their console of choice.

However, OnLive's hype machine will only get louder. The merits of social gaming -- and OnLive claims to be the first video-game-based social network -- will also draw more media attention.

The future of gaming isn't here yet -- but it will be in three months. Get cracking on those caskets.

Will OnLive revolutionize gaming, or is it just another flash in the pan? Share your thoughts in the comment box below.

Microsoft is a Motley Fool Inside Value pick. Take-Two Interactive Software is a Motley Fool Rule Breakers recommendation. Electronic Arts and Nintendo are Motley Fool Stock Advisor selections. GameStop is a former Motley Fool Stock Advisor selection. Motley Fool Options has recommended a write covered calls position on GameStop. Motley Fool Options has recommended a diagonal call position on Microsoft. Try any of our Foolish newsletter services, free for 30 days.

Longtime Fool contributor Rick Munarriz will admit to still playing video games, though finding time is the rub. He does not own shares in any of the companies in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


Read/Post Comments (7) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 11, 2010, at 1:28 PM, cctx wrote:

    David,

    If you want to post a commentary about a company at least get the facts correct. You indicate that in the 'subscriber model' the user will not have to purchase new games. You are absolutely 100% wrong. The $14.99/month subscription fee provides access the OnLive service. This does NOT include carte blanche access to games. The user is able to rent, or purchase, a limited selection of games extra cost. Yes, the selection should improve over time.

    You also indicate that the console manufacturers will take it in the rear. Again I think you are incorrect because consumers will always flock towards the most affordable cutting edge technology. If you think teh console manufactures will remain a sitting target you are truly mistaken.

    Don't get me wrong because I do agree that OnLive is a threat. But so was WalMart and Best Buy with their used game program. Any company that sits still will loose and that's a given.

    Please research all your facts before you post an article. Thanks....

  • Report this Comment On March 11, 2010, at 1:37 PM, cctx wrote:

    David,

    Before you post a comment please do your research to ensure the statements you make are accurate. In your post you indicate the OnLive user will not be buying any games. You are 100% wrong in making that statement. The $14.99 OnLive subscription fee allows the user to access the service. From there the user is able to choose from a variety of software titles to either rent or purchase.

    While the 'cloud computing' nomenclature sounds compelling we've essentially been using similar technology for years. Think about Remote Desktop or Citrix. The unique aspect of OnLive is that they have the capability to compress and stream a high volume of audio/video. How much is yet to be seen. An accomplishment it is but not a quantum leap.

    You also indicate the console makers will take it in the back side. I disagree. Consumers will always flock to the technology that is the most technologically advanced for the least cost. I think all the console manufacturers will step up and produce some very innovative hardware. I also believe the software publishers will put together some stunning titles to run on it. If not the holdouts will end up being the loosers.

    I do agree that GameFly will probably end up a looser no matter what. GameFly will be embattled from every angle and I don't see them as a going concern.

    In the future please fully research your material before posting. Thanks.

  • Report this Comment On March 11, 2010, at 2:49 PM, militauro wrote:

    Rick, I always enjoy the articles you post but I can't help but disagree almost completely on this one.

    As another user stated, there will be additional costs to purchase/rent on top of the $14.99 subscription fee. I like OnLive, I think the service they will be providing can definitely be a winner. However, there's a reason the gaming industry currently supports three consoles...which is the franchises they carry exclusively. I'm not sure how Sony, Microsoft, or Nintendo can be in trouble if they wouldn't dare toss their exclusive franchises and destroy themselves. You'll never see Mario, Zelda, Halo, or Sony's God of War in the mix. Also, this is PC gaming any way you look at it. There is a clear, fine line between console and PC gamers.

    I also don't understand the logic against GameFly. They don't even rent PC games and will not be affected by this at all in my opinion.

  • Report this Comment On March 11, 2010, at 3:45 PM, gaucho420 wrote:

    I also disagree. First, the Nintendo games will never appear on there and if there's been one constant since the 80s, its Mario, Zelda and the rest. Last time I checked, they're the runaway market leader. So then it goes to the hardcores (I own all three consoles by the way). Why would I want to pay $15/month to LEASE someting I can buy? And then, trade back in to Gamestop for credit? With Onlive, there's no trade in.

    2nd, what if Onlive goes down? No access to your games...with a console (outside of that odd PS3 clock thing), they rarely go down due to network error and if they do, you have the game on your harddrive or disc to play anyways. So as a gamer/investor who's very familiar with this field, I would have to disagree.

    I also know a very wide range of gamers and not one single person is excitted about this thing, not the least of which is that the best games are EXCLUSIVES to this console or that (Heavy Rain anyone?), so really, this is just the 2nd tier games, mostly...no Halo, no SMB, No Uncharted. That's great that GTAIV will be on there, but its also on the PS3 & 360.

    Overall, its going to be a swing and a miss. Watch.

  • Report this Comment On March 12, 2010, at 11:50 AM, Enduro wrote:

    Over ten years of experience in the industry here and I have to agree with each of the other posters -- OnLive is on nobody's radar.

    The acceptance of digital delivery through Xbox Live and PSN is only slowly beginning to win people over. Gamefly works because it's like Netflix and people understand that. When Redbox finally adds videogames to their kiosk system, that will be yet another tempting avenue for gamers.

    But this? This is merely a version of the Phantom that actually found a way to make it to market.

    The $15/month is only netting you the permission to play demos of games. More money is needed to actually play full copies of the games.

    Also, consider how much backlash there has been towards Microsoft's $50/annual membership for Live (an absolutely fantastic value, IMHO) this OnLive company expects to be successful charging $180/year? For a digital ghost-town?

    This article is highly off-the-mark.

  • Report this Comment On March 12, 2010, at 12:54 PM, LAFrankie wrote:

    Once again Motley Fool has posted another fact less rant regarding the demise of video game retail without knowing the first thing about the industry, technologies involved and gamer habits.

    To think that gamers will en masse flock from console gaming to PC gaming is a pretty backwards theory to say the least. PC gaming, despite being up 3% in 2009, accounts for less than 20% of total revenue in the industry (source PC Gaming Alliance, Mar 2010.) If you've been to a Gamestop recently you would have noticed that PC games represent a fraction of the inventory.)

    I won't go into digital delivery because we are still many years before storage capacity, bandwidth limits and broadband availability even make it a reality. Motley Fool has been suspect of crying digital wolf in previous articles as well. Very ignorant.

    Lastly, I will agree that other forms of games are eating into the retailer's pie. Social games and mobile titles specifically. However... to say that all genres can't co-exist is very shortsighted. In Hollywood, have the Blockbuster films been run out of town by Independents? Last I heard, Avatar made over 2.5 billion dollars worldwide. Similarly, Gamers will always want their blockbuster titles. MW2 is a perfect example of this. It broke all sales records just a few months ago. Digital delivery (DLC) will only prolong this revenue. Hence, publishers will continue to put out big budget titles -- which by the way can only be delivered on BD / HD-DVD. This isn't going to change for a very long time.

    OnLive is a good service, but a niche service at best. Gamestop has over 6000 stores worldwide. You people at Fool make it seem as if all of them are going to be turned to shoe outlets overnight. It makes me question exactly where your research is coming from or if you are just going with whatever fear mongering is popular today. News flash, video games weren't recession proof like everyone though. That's because nobody can predict tomorrow's creative minds in the industry. Who knew 2 yrs ago that Farmville would be the most popular PC game in the last year?

    Well, the Japanese did but still...

  • Report this Comment On December 08, 2010, at 10:54 PM, BylonairBoysClub wrote:

    I agree with most of these comments; however, Take Two Interactive, Electronic Arts, and THQ look niceee right now.

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