OnLive crushed by high infrastructure bills

The on-demand gaming service overestimated the number of servers needed

Streaming video game service OnLive is based around powerful servers that streams games to inexpensive TV adapters in the homes of its users, but it was a miscalculation in the amount of infrastructure needed that ultimately led the company to the brink of bankruptcy.

OnLive operates an on-demand video gaming service that runs computer games on its servers and streams them to users via a low-cost TV adapter.

On Friday, the company said it would utilize a part of the California civil code that enables a company's operations to continue under a new owner. The provision, called an "assignment for benefit of creditors" or ABC, means users will be able to continue using the OnLive gaming service, but also means all employees were fired on Friday with a complete loss of stock options they had been awarded.

The news was broken to employees by CEO Steve Perlman in a company-wide meeting at 10 am, according to a former employee who requested anonymity.

"It was such a shock," the former employee said. "We went in thinking it was going to be a big announcement, we knew they had been fielding acquisition proposals ... and we thought he would announce we are acquired."

Instead, employees heard a 20-minute address from Perlman that began with him telling them how proud he was of their work and slowly moved into business matters.

Perlman told his workers that when the service started they were not sure how many servers would be required and they ended up with around 8,000 servers on three-year leases as well as the networking resources to support the gear. On average the company had only about 2,000 users online at any one time so it was not able to turn a profit.

Calling what he was about to announce "the most painful thing I've ever done," Perlman said the company would use the ABC provision to enable the service to continue while it was acquired by a new owner. The new owner was not identified, but Perlman said he was an "extraordinary, very accomplished and well known VC."

He then broke the news that "most" of the staff would not be rehired by the new company. Only those deemed essential to its operations would receive offers -- a number the former employee puts at between 20 percent and 40 percent of workers.

Those that did not receive offers were told they would be paid through the end of the month. Stock options were rendered worthless by the move.

"I gave that company years of my life, it sucks," said the former employee.

On Friday afternoon, some employees were seen leaving the company's office in Palo Alto with moving boxes in arm, but none would talk to a small group of waiting reporters.

Perlman concluded his address by accepting blame for what had happened.

"Most of it is on my shoulders. I'm the one," he told employees.

OnLive had attracted millions of dollars of investment from a number of companies including Warner Bros., Autodesk, Maverick Capital, AT&T, British Telecom and The Belgacom Group.

Martyn Williams covers mobile telecoms, Silicon Valley and general technology breaking news for The IDG News Service. Follow Martyn on Twitter at @martyn_williams. Martyn's e-mail address is martyn_williams@idg.com

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