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How OnLive Will Kill Video Game Consoles

For decades consumers who wanted to play the newest, coolest video games had to buy expensive TV consoles or top of the line computers. But with the launch of the streaming game service OnLive this weekend, the death of expensive consoles from Microsoft (MSFT), Sony (SNE) and Nintendo (NTDOY) may finally be in sight.

The concept behind OnLive is simple. Instead of buying a console, you just sign up for the service and it streams the games to you over the web. All the serious computing is done by OnLive, so users can enjoy hot new titles on their crappy old laptops. It's video gaming in the cloud.

The service is the brainchild of Steve Perlman, formerly of Atari, Apple (AAPL) and WebTV. But despite Perlman's pedigree, most folks in the gaming and tech community were skeptical OnLive could really deliver. "It's like Ford saying that the new Fiesta's cruising speed is in excess of the speed of sound," wrote one suspicious gaming blog. Well, the service went live over the weekend, and the results were positive. Farhad Manjoo over at Slate said that, "Playing OnLive was indistinguishable from playing games on a console or PC -- except when I looked down at my computer and saw a machine that any serious gamer would laugh at." Most everyone agreed the games played well, although few agreed with Manjoo that they were indistinguishable from the console version. Jason Chen at Gizmodo wrote, "It felt natural, and I could easily see myself forgetting that all the hard work was being done in a server miles away and not two feet away from me. That is, if the graphics didn't take me out of it."

The service presents a real threat to the $20 billion market currently dominated by the Microsoft, Sony and Nintendo. These companies actually sell their expensive consoles at a loss, because they know that they can recoup the money selling gamers individual titles at $60 a pop.

Onlive plans to offers subscription and rentals plans that would let gamers spend quality time with the newest titles for just a few bucks. On top of that, OnLive's customers won't have to pay every few years to upgrade to the newest machine. All those improvement will be made remotely, at OnLive's expense.

Add to that the fact that users can play the games anywhere they have an internet connection and OnLive could potentially be as disruptive as Netflix. We'll see if the service can maintain its quality once it expands beyond a small group of reviewers to a few hundred thousand gamers. For now, it's definitely turning some heads, and scaring some CEOs.

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