Aug. 14 (Bloomberg) -- The next major video-game platform may be no platform at all.

For the last three decades, the pattern has been the same: Every few years, the major game-console makers -- these days, Sony Corp., Microsoft Corp. and Nintendo Co. -- come out with newer, slicker players.

Now OnLive, a Silicon Valley startup, is about to begin large-scale testing of a system that, if it delivers on its promises, may break the cycle and usher in a new era in a video- game market estimated at $21.3 billion in the U.S. and more than twice that worldwide.

The idea is to run games in “the cloud” -- distant servers connected via the Internet -- and stream them to your television or personal computer with as much speed and power as if they were running locally. The service, which has been demonstrated publicly but so far only tested internally, is about to open up for a wider public beta trial next month, and scheduled to officially launch this winter.

This isn’t about downloading games; it’s about actually playing them on computers that might be as far as 1,000 miles away, counting on the Internet to deliver an experience indistinguishable from an Xbox or PlayStation.

It’s almost the textbook definition of disruptive technology, and some heavy hitters are betting OnLive can pull it off. The Palo Alto, California-based company is backed by hedge-fund manager Maverick Capital, Time Warner Inc.’s Warner Bros. unit and graphics powerhouse Autodesk Inc. And it has signed deals with most of the major game publishers to put their hottest titles onto the service.

‘Benjamin Button’

The man behind OnLive is Steve Perlman, a Silicon Valley veteran whose credentials include QuickTime, Apple Inc.’s streaming video technology; WebTV, which was purchased by Microsoft; and MOVA Contour, the motion-capture system used in the movies “The Curious Case of Benjamin Button” and “The Incredible Hulk.” The executive team also includes Mike McGarvey, the former chief executive officer of game-publisher Eidos Plc, and veterans of such onetime tech stalwarts as Netscape Communications Corp. and MySQL.

From the gameplayer’s perspective, the OnLive system couldn’t be much simpler. For computer users, all it takes is a browser plug-in, an easily downloaded piece of software; for TV users, OnLive will supply a simple adapter -- about the size of a couple decks of cards -- and a wireless handheld controller like those used by dedicated game consoles. OnLive’s games are platform-independent: Windows PC users may find themselves playing against Mac- or television-based opponents.

Latent Threat

The enemy of online gaming is latency, the length of time between when an action is initiated -- a sudden turn on a motorcycle in Take-Two Interactive Software Inc.’s “Grand Theft Auto IV,” for example -- and when its effects show up on the screen. The delay is measured in milliseconds.

What makes OnLive plausible is the work Perlman and team have been doing -- work on the service began in 2002, he says -- on video compression, the process of squeezing the vast amounts of digital information that must be shot back and forth over the Net between users and the distant data centers where the games are being run.

Perlman says OnLive’s combination of compression algorithms, distributed data centers and deals with Internet carriers to minimize transmission delays typically pushes the latency figure as low as 25 to 35 milliseconds, and no more than 80 in the worst case.

Fast Enough

That may not be quite as fast as having a PlayStation 3 in your den -- but it is fast enough, faster than any human being can detect. The company says it can deliver standard-definition video over a 1.5-megabits-per-second connection, and high- definition over a 5-mbps link.

I’ve seen the service being used to run games including Electronic Arts Inc.’s “Crysis Wars” -- a complex, three- dimensional first-person shooter -- from OnLive’s offices over the Internet to nearby servers using both cable and DSL modems. It worked, with no evidence of a little man behind a curtain manipulating the bits and bytes.

The list of those potentially threatened by OnLive is a long one. Start with Sony, Microsoft and Nintendo, who make money from the sale of hardware and from the royalties they get from game publishers. None of the companies have disclosed plans for their next-generation consoles, the most recent of which, Nintendo’s Wii and Sony’s PlayStation 3, were introduced in 2006. The Xbox 360 came out in 2005.

Piece of Action

Then there’s the second-hand game market, represented by GameStop Corp. The fact that publishers can’t get a piece of the action when their titles show up for resale explains part of their attraction to OnLive, where they can count on a cut every time one of their titles is bought or rented.

Another lure is the hope that customers will use some of the hundreds of dollars they would no longer have to spend on consoles to buy more games instead.

Game publishers would also be less tied to the hardware- makers’ development cycles, and OnLive’s social-networking component, which includes the ability for users to become spectators watching others play games, could conceivably open new opportunities for sponsorships, in-game advertising and maybe even admission charges to observe virtual tournaments.

But first, OnLive will have to prove it will work in the real world. While some of the skepticism that greeted its public unveiling earlier this year has been muted, the public beta should start to answer lingering questions about how it will perform in an environment with thousands of simultaneous users, iffy Internet connections and other things out of the service’s direct control.

Pricing Permutations

McGarvey says the beta will also test various price points and permutations of the business model -- how much to charge for a basic subscription, for example, and whether the company should simply give away the TV adapter hardware.

Perlman is careful to avoid making bold predictions about the demise of the dedicated-console business; in any event, Sony, Microsoft and Nintendo are already busy adding online services to link their own console users and, increasingly, distribute content. He says he’ll be glad if OnLive just establishes itself as a viable platform alongside the existing players.

“It’s a $50 billion industry, and we’ll be happy if we peel off a billion of it,” Perlman says.

“No, we won’t,” McGarvey corrects him. “Ten percent.”

(Rich Jaroslovsky is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: Rich Jaroslovsky in New York at rjaroslovsky@bloomberg.net.

Last Updated: August 13, 2009 21:00 EDT