Anyone remember how Unix-based mainframes work? You have a massively powerful computer behind the scenes doing all the crunching called the mainframe, and you have "dumb terminals" that consist of a display and a keyboard. The mainframe does all the work, the terminals are just access points. That's all this is, done over the internet. You provide input via keyboard, mouse, joystick, etc, the input goes out to the OnLive server, and you get images and sound streamed back to you.
I can see several reasons why this won't replace localized game content. First, latency. Everyone here knows how ping works. Now imagine that latency induced into every single game you play, and it's unavoidable. If the nearest OnLive server is 200 msec away... It would be like playing Net Quake over the internet. One good way to see what it would be like is to connect to a Q3 server and type /cg_predict 0. Try playing like that for a while and see how enjoyable it is. Without localized content and game logic you cannot do prediction, period. Without prediction, latency is very annoying and very noticeable.
Another factor is connection quality and bandwidth overhead. Streaming HD-quality graphics takes up a lot of bandwidth, and any disturbance to that stream is going to mean the difference between dodging a bullet and getting your virtual character's head blown off. If your connection isn't 100% smooth you'll have problems. Anyone have family members that tie up the net downloading rubbish? That 5-7 Mbit connection gets divided between all the computers on the network, and if someone else starts streaming something at the same time then what is going to happen?
Lastly, let's consider gameplay quality. Are we talking YouTube-like compression coming in at a 30 FPS frame rate? If it's HD image quality, again, what about the frame rate? What kind of user controls are going to be in place for customization? I can adjust and customize lighting and other effects locally. How do I control what the server is going to render?
Any time someone comes up with this "Oh, let US host everything, you just pay us a monthly fee and we take care of it" scheme I cringe. Tell me how this service is going to outperform my own system where I can render games at 1280x1024 or higher at 75Hz with FSAA, Anisotropic filtering, have instantaneous response, AND customize the game's controls as I see fit? The subject of mods and multiplayer gaming wasn't even touched either. In addition, my computer did not cost $4000 to build. It cost probably about $1000 over the last three years after all the upgrades have been considered, but initially it was around $600-700. Anyone paying $4000 for a computer is either ignorant and being fleeced, or too rich to care one way or another. I also use the computer for a lot more than playing video games. This service may have use to some people, but I don't think it's going to replace installed games any time soon, just as Steam and similar download-only services have not done away with box-on-shelf distribution.
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