"I'm the one that brought you here. I'm the one that ultimately made decisions, and I'm the one that ultimately takes responsibility. So I am sorry, and it didn't end up exactly as we'd hoped."

Two Fridays ago, Steve Perlman told the 200 employees of cloud gaming company OnLive that it was all his fault. He thanked them for their hard work, and then he had HR show them the door with no severance pay.

Then, through a legal insolvency tool, Perlman transferred all of OnLive’s assets to a brand new company and took over as CEO, hiring back only a skeleton crew to keep the ship afloat.

Employees were mad as hell, but not just because they’d lost their jobs and benefits without warning. Former staffers told The Verge that though Steve Perlman was the technical genius behind OnLive, his ego was the company's undoing.

At the 2009 Game Developer's Conference in San Francisco, OnLive was the talk of the town. Steve Perlman, the brains behind QuickTime, WebTV, and facial capture technology Mova, said he'd found a way to stream computer games over the internet at maximum graphical settings. Skeptics were everywhere — one long-term employee remembers how GDC attendees tried to pry open the booth walls to look for proof the demos had been fudged — but the idea was quite sound.

The actual game would run on a powerful server miles away, which the user would remotely control, and that server would stream compressed video frames of the action back to the user, letting them watch the game in motion. Yes, it could play Crysis, and that was actually one of the original games the company let attendees try at the show, streaming from servers 50-odd miles away in Santa Clara, California. The promise was greater still: since OnLive could harness the power of server farms, yet run on practically any device with a solid internet connection and the ability to decode video, the company could deliver those high-end Windows PC games to a Mac, an iPad, or even a cellular phone.

OnLive was a media darling from day one

OnLive was a media darling from day one. "It was so exciting watching the Twitter traffic for mentions of OnLive that day. Initially, we were forwarding news articles to each other, but eventually there were so many we gave up," one long-term staffer told me. "More people searched for 'OnLive' during the Game Developers Conference than for the phrase 'video games,'" boasted Tiffany Spencer at the time, who handled PR for the company's launch. Over 100,000 people signed up for a closed beta of the service. Investors and game publishers lined up.

And yet, three and a half years later, Perlman locked himself in a conference room for a week to figure out what to do with the failing company.

The problem was simple. OnLive never made any money, and it was burning through as much as $5 million a month. As Perlman himself explained during the fateful all-hands meeting, the company had deployed thousands of servers that were sitting unused, and only ever had 1,600 concurrent users of the service worldwide. Over the past week, OnLive has tried to distance itself from that 1,600 number, but every former employee we spoke to in a position to know told us that it was true. "We were so optimistic at launch, but the users never came," one long-time staffer said. "There were all these reasons why we were going to be an instant success, but it didn't succeed instantly." Even if the users had come, though, some employees dispute whether the service could scale: OnLive needed a physical machine for each concurrent player, and though Steve continually pressed the team to figure out a method to virtualize the load, the current model might have been untenable. When Nvidia offered possible solutions, though, employees told us the company decided not to negotiate.

Officially, the company states it has 2.5 million users, and 1.5 million active users, but staffers tell us those numbers count every single person who ever signed up for a free account, or tried it in the last year. The other thing you need to understand is that many of those users never paid a dime. One of OnLive's most compelling features was that you could instantly try a time-limited demo of any game without having to install a thing. "We had single-digit income a lot of days after launch," one employee told us. Many users never paid a dime In terms of sales, the company counts first-person shooter Homefront as one of its successes, and yet the game sold in the low thousands, according to one former employee. OnLive did better with the PlayPack, a Netflix-like subscription to back-catalog titles for $9.99 a month, but one well-placed employee says the firm had as few as 12,000 subscribers on board. In an attempt to spur sales, OnLive offered a free MicroConsole with many purchases, a $99 set-top box that came with a wireless controller, exclusively for playing the OnLive service. The silicon was inexpensive, but one source told us that even at $99 the company took a loss, due to the pricy materials and all the cables that management insisted they include in the box.

If you ask employees, they can point to any number of reasons why the paying users didn't come. Broadband in the United States is fickle, and even in households with a good connection, if one family member started up a YouTube video, that could disrupt the other's game. Within those bandwidth constraints, the service streamed games at a compressed 720p resolution, on par with consoles, but which didn't look as good as titles rendered by a proper gaming PC. That could have alienated early adopters, whom the company relied on for positive word-of-mouth. Despite these and other limitations, game publishers insisted on charging a similar MSRP. But above all, OnLive failed to secure the most important reason that gamers migrate to a new platform: top-tier games. Electronic Arts and Activision, the two biggest video game publishers, were no-shows on OnLive. Negotiations failed with Bethesda, maker of the wildly popular Oblivion and Skyrim role-playing games, and Valve, which makes Half-Life, Left 4 Dead, Team Fortress and Portal.

The thing is, Electronic Arts was actually on board. Former staffers told us Mass Effect 2 and Dragon Age: Origins were ready and would have launched on day one if it wasn't for Steve Perlman. At GDC 2009, when OnLive revealed itself to the world in style, a rival named Gaikai did the same behind closed doors, and when Gaikai CEO David Perry came by the OnLive booth to greet his competitor, Perlman starting screaming at him. On June 17th, 2010, the day OnLive launched, Gaikai announced a multi-year deal with Electronic Arts. Perlman received the news in the OnLive booth at E3 2010. "He went ballistic," one witness recalls. "We had to slam the conference room shut and crank up the music so people wouldn't hear him." Perlman told EA he wanted exclusivity, even though Gaikai only offered game demos via the web rather than fully playable purchases. When EA refused, Perlman ordered his staff to remove all EA titles from OnLive. "We were instructed in no uncertain terms to pull the EA games at the very last minute," one ex-staffer related. Mike McGarvey, COO at the time, argued against the move, but Perlman wouldn't hear it. Shortly after the launch, McGarvey was sidelined.

From then on, employees told us, Steve shot down any game that Gaikai nabbed first; even titles that the company had already spent money to onboard, test, and certify with a game publisher. Both OnLive and developer CD Projekt RED confirmed that The Witcher 2 would arrive on the service, but Gaikai got it first.

Steve shot down any game that Gaikai nabbed first

Bulletstorm was an attempt to get back into EA's good graces last year, and the game was ready to go — but when Gaikai added a web demo, sources tell us, Perlman pulled the plug. When Ubisoft refused to drop demos from Gaikai, he threatened to cease doing business with the company. Perlman also allegedly scared Valve off with a broad pitch when the company merely wanted to test the waters, and a source told us that negotiations with Bethesda failed because OnLive simply wasn't willing or able to pay a fee to offset the onboarding costs of their games.

While OnLive was struggling to attract and retain game content abroad, though, employees told us Perlman was also beginning to alienate his staff at home. Steve Perlman has a fairly well-documented reputation for not getting along with others, and as the majority shareholder at OnLive he didn't have to answer to a soul. One manager told us that he outvoted the board of directors on occasion. Several employees mentioned that Perlman also kept cabinets full of special double-wall glass mugs and expensive tea exclusively for his use, and personal assistants whose job it was to keep them full, citing this as a sign that Perlman felt he was above his employees in some regard. Others accuse him of favoritism when hiring Etienne Handman as COO, whom he introduced as an old friend and who, some claim, blocked deals he didn't understand due to a lack of knowledge about the gaming space.

Mostly, though, ex-staffers told us they objected to Perlman's short-term goals and obsessive micromanaging. "Steve's a genius, don't worry about it, he'll figure it out," his defenders would say, when employees raised concerns about the company's lack of visible budgets or long-term planning. The company never had a CFO, and even managers who were outside Steve’s inner circle complained that they were left in the dark. Several ex-employees told us the major reason users never came is because OnLive never had a real marketing budget, and after the original VP of marketing left, the company was unable to fill the role. When the existing director of marketing applied, she was turned down. When she turned in her notice, Steve allegedly fired her on the spot. One prospective candidate told us that they didn't want to work under Perlman, a skilled salesman, because he insisted on doing everything himself, from criticizing photography to writing press releases, and publicly ridiculing those who didn't live up to his standards. "Steve had that talent, but he never empowered anybody," one ex-staffer told us. "He would tell people they were stupid in front of the entire office."

"Steve's a genius, don't worry about it, he'll figure it out"

So, instead of attempting to find additional users, Perlman focused the company's time and resources on developing new products and features in the attempt to attract additional investment, sometimes on extremely short notice. Perlman waited until mid-December to tell employees that they’d have to work over Christmas vacation to push out the PlayPack subscription package. Still, long-term staffers told us that for about a year after launch, things were relatively calm, possibly thanks to the $40 million that HTC invested in February of last year. "I think if you asked me in the summer of 2011, I would have said hands-down this is the best place to work," related one.

That's roughly when employees began to notice a change of atmosphere at the company. Things started to feel desperate, and the company pivoted like mad. Employees told us that it seemed like Steve was looking for an exit. The service launched in the UK in September 2011, airlifting servers from the US at great expense to handle the initial load. By December, they had developed mobile apps for Android and iOS, and rearchitected the company's wireless controller to work with Bluetooth and a 2.4GHz USB dongle. OnLive never gave up on the iPad app, but deprioritized work as it became clear that Apple would never approve without getting a piece of the action itself. Then, immediately after the December app push, it was a sprint to push out OnLive's Cloud Desktop service in time for the January Consumer Electronics Show, which meant employees lost their Christmas break on short notice for the second year in a row. "We always delivered things very fast under really tight timeframes, but I felt that the asks were getting bigger and bigger, and the infrastructure... wasn't architected for the types of problems we were asked to solve," said one. Another employee claimed that during the Christmas rush, Steve would call to see how work was progressing, from his cabin in Lake Tahoe.

People started to leave, and they weren't replaced: around December 2011 the company instituted a hiring freeze. With over 200 staffers, unused servers and an expensive office in the heart of downtown Palo Alto, the company was feeling the crunch, and it didn't look like Perlman was interested in saving the firm. He'd allegedly turned down offers from Sony, Dell, and Adobe in the past.

Then, in June of this year, Hewlett-Packard came calling.

An HP executive gave Perlman a personal check for $10,000 to open negotiations, and then offered $15 million for an exclusive 60-day window to make a deal. HP was primarily interested in OnLive's Cloud Desktop platform, perhaps seeing it as a way to revitalize their enterprise tablet business. Then, in June, Hewlett-Packard came calling Allegedly, HP already had clients lined up for the idea, and employees worried the games business would fall by the wayside. About a month ago, though, employees discovered that the deal had fallen through, and management hadn't said a thing. The excuse was allegedly that HP's stock price had fallen and that the company couldn't afford OnLive anymore. Morale fell yet again, and more employees left.

Still, up to the very last moments before the fateful all-hands meeting on August 17th, employees thought Steve was about to make a deal. Rumors swirled that LG, Samsung and Vizio were interested in buying, each hoping to make a play for the smart TV. The rumors were founded in part by the highly tentative deals each of them had with OnLive or Gaikai to preload a cloud gaming service. Two Fridays ago, when Perlman apologized and told employees their stock was worthless, they were utterly shocked to hear that the company hadn't been bought. Many clapped during the presentation, having no idea they were being laid off.

Not least of which the employees who spent real money to buy their stock. We spoke to employees with tens if not hundreds of thousands of options, and while many didn't exercise the right, some actually purchased real stock, spending thousands of dollars for what is now reportedly worth nothing more than the paper it was printed on. If OnLive had sold to any of the bidders Perlman rejected, they claim, they might have been able to cash out. What really angered them, though, was that the company hadn't really reduced the value of their work to nothing at all: Perlman had seemingly found a legal loophole to extract that value and deprived them of it in the process.





The Assignment for the Benefit of Creditors, as it turns out, is a fairly commonplace legal alternative to bankruptcy which can help things turn out better for all parties involved, and it's quite likely that everything was done above board. It's even relatively common for an assignee to sell a company's assets as soon as they're transferred: it's called "sale as a going concern."

Steve lost control of the company

It's important to note that all parties lost their stock in the process, including Steve, who lost control of the company. Still, federal courts have expressed a particular worry about California’s ABC laws: since they allow companies to transfer assets to whomever they want and sell those assets at any price they wish, there's a risk of abuse. One source tells us that in this case, the assets might have been sold for as little as $4 million. It seems that in a world where Sony bought Gaikai for $380 million and companies like HP dropped $15 million just to negotiate, the property would be worth a little bit more.

It's hard to say, though. Steve Perlman convinced many players that OnLive was worth investing in, up to and including some employees who gambled their money knowing that the company wasn't making a dime. Everyone we spoke to believed in the power of the cloud. Everyone expected a savior around the corner, but when it came to realizing that vision, only Steve was holding the cards. In hindsight, said one employee, management didn't do such a bad job: "They managed to carry this thing four years longer than anyone thought they would." Steve also donated $50,000 to a fund to help former employees pay for some health insurance.

The question is what happens now. The new OnLive says it hired nearly half the staff back and intends to continue the business as if nothing happened, but employees dispute that, stating that only around 60 employees got rehired, and a number of them only on 30-day contracts. Sources tell us that critical departments got scuttled, including the teams responsible for onboarding new games. It seemed like the company brought on a skeleton crew to keep the ship running while it preps the company for a sale. Then, something strange occurred. Employees convinced the new owner, Lauder Partners, to let Steve Perlman go and put employee-friendly former head of operations Charlie Jablonski in charge.

Make no mistake, OnLive was the future

Make no mistake, OnLive was the future. Companies who embrace cloud computing will want to give their customers a way to manipulate those computers as if they were in front of them. Streaming games make sense: There’s no ability to pirate titles, and manufacturers don’t have to build up an install base by selling expensive hardware to their customers at a loss. But as with Quicktime and WebTV, it seems that Steve Perlman had an idea ahead of its time yet again, and under his management, much of its potential may have been squandered. With the cloud streaming poster child in the throes of insolvency and its spokesman departing for greener pastures, it may be difficult to reconvince investors of that potential in the short term. We're curious to see how OnLive will proceed without its all-powerful founder at the helm.