There is an old adage that when a deal seems too good to be true, it probably is. When Onlive, the network gaming company, started offering not just Microsoft Windows but Microsoft Office for free on the iPad, and now on Android, it certainly seemed too good to be true. Speculation abounded on what type of license they could be using to accomplish this magical feat. From sifting through Microsoft’s licenses and speaking with sources very familiar with them, the ugly truth may be that they can’t.

Microsoft does allow service providers to in effect “rent” Microsoft Office to customers, for a fee that works out to about $10 per month per user. This is not per simultaneous user, but per licensed user. So that each tablet owner who signs up for the Onlive Desktop and accesses any of the Office applications provided — Microsoft Word, Microsoft Powerpoint, or Microsoft Excel — would cost Onlive $10 per month. It is plausible that Microsoft might cut a slightly special deal with Onlive for marketing reasons, but not plausible that it would suddenly allow someone to give away its cash cow for free.

If Onlive can’t afford to spend $10 per month for every free user, and isn’t insane enough to be pirating Office outright, the only other available licensing option is a per processor service provider license (SPLA). This uncommonly used license is designed to allow unlimited users per licensed processor. Pricing for the license isn’t public, but it can’t be cheap. Just about the only plausible theory is that Onlive loaded up on a bunch of these licenses as a marketing cost. That would also explain why the Onlive free service is “subject to availability.” If this is indeed the case, expect Onlive Desktop’s popularity to contain the seeds of its own ruin, as eventually the free users will overwhelm the licensed servers and be more likely to become grumpy than willing to pay up for the paid version.

Onlive’s hope here may simply be that Microsoft has good reason not to go after it aggressively. Rumored to being close to launching its own Office product for the iPad, and ramping up its Office hosting service, Office365, Microsoft may be sensitive to charges of bullying and possible anti-trust lawsuits. In either case, with Office365 boasting a $24 per user per month price tag for full functionality, and similar Office hosting providers charging from $29 to $39 a month, Microsoft can’t afford to stand idle indefinitely while Onlive gives their software away.

Onlive Desktop doesn’t stop with Office, though, like some other Office hosting companies do. It provides access to a full-on Windows 7 desktop. This is even more dangerous territory, as there is no SPLA for Windows 7. The Windows 7 desktop just plain can’t be rented. Microsoft has made that clear time and time again, even causing one of their long term MVPs, Brian Madden, to publically quit in frustration. There are ways to license remote access into a shared Windows Server 2008 installation, but Onlive is very clear that they provide a Windows 7 desktop experience to their Onlive Desktop users.

Just like with Office, rumors of a secret deal between Onlive and Microsoft on Windows are rampant. However, unlike with Office, Windows licensing has been heavily scrutinized ever since the Consent Decree Microsoft signed with the Department of Justice, so it just isn’t possible for Microsoft to cut special deals without getting into legal hot water. Sources close to the company have told us that there certainly haven’t been any special deals cut in this case. Microsoft just recently confirmed as much when Joe Matz, Corporate Vice President of Licensing and Pricing went on the record with “We are actively engaged with OnLive with the hope of bringing them into a properly licensed scenario, and we are committed to seeing this issue is resolved.” Coupled with the fact that Onlive has been unwilling to provide any details of their licensing strategy to help allay fears of potential users, it seems clear that Onlive is going to need to pay up big or fight Microsoft on some other grounds.

The likely endings for anyone becoming addicted to the excellent and free Onlive Desktop offering aren’t happy ones. Unless Onlive really can perform magic, either their free Desktop service will need to be withdrawn once Microsoft decides to take aggressive action, or customer overload will slowly make it unusable and force anyone wishing to stay with it to pay up.