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You "port" a PC game to OnLive and it gets sold to OnLive clients. However, the OnLive platform runs on Mac OS X and Windows, and soon, independently on your TV. At E3, OnLive demoed it running on the iPad.
Mac OS X users now get access to a ton of games that they wouldn't have otherwise. If OnLive creates a Linux client, that will be even more dramatic: Linux users who traditionally are lucky to see a AAA title per half decade would suddenly be treated to a buffet of games.
I wonder how happy microsoft is about the prospect of people playing directx titles without necessarily owning a windows license.
There's something else. The prospect of not having to buy the latest gaming rig is a "Free Lunch". That gaming rig has to be somewhere, and it has to be paid for by someone. And in the end, that someone is always the customer.
Granted, those servers can be shared, but then there's bandwidth costs and everything, so it won't amount to much.
Also, someone on a 13ms connection saying "meh, it doesn't lag that bad" is pretty much useless.
I imagine people would only use OnLive to play games their system is to slow for. Those games are usually shooters. Shooters are played online. With the additional lag of OnLive, you won't win online matches. Games like WarCraft III run everywhere and are cheaper without OnLive, no need for that. And no one will play Crysis on the iPad, because it wasn't designed to be played with multitouch.
Interesting idea, but I think it'll fail for various reasons.
For single-player FPS games it will be alright I guess (and if the servers are directly in the local datacenters of your internet provider, than it will scale without much trouble).
And lets face it, there is a huge number of more or less casual gamers who would probably like to play the newest singleplayer FPS games, but don't do it since they didn't buy a gaming rig.
So I am pretty sure that unless they do some really stupid marketing, this OnLive will be pretty successful, just not with the "hardcore" gamers (and probably also with the linux enthusiasts).