UPDATE: In a statement provided to All Things D, OnLive denied rumors that it is shutting down, but did not address the reports of massive layoffs. "We don’t respond to rumors, but the service is not shutting down," the company said.

Meanwhile, a Kotaku source suggests the company is filing for bankruptcy protection in California, and that the service will continue as the company re-forms around some core management.

ORIGINAL STORY

The much ballyhooed concept of streaming games through the cloud seems to have taken a major hit today, as reports are surfacing that major cloud gaming company OnLive has laid off its entire staff in advance of a possible closure or transition to a very different form.

Mashable reports word from inside sources that OnLive held an all-hands meeting this morning in which all employees were told they had been fired. Some of those employees may reportedly be hired back as the company transitions into a new iteration, which might be more focused on exercising its portfolio of streaming patents.

The Verge received an e-mail from a supposed employee confirming the staff layoffs and expressing uncertainty about the future of the service. "A new company will be formed and the management of the company will be in contact with you about the current initiatives in place, including the titles that will remain on the service," the e-mail reads, in part.

OnLive is one of a number of services that seeks to revolutionize game distribution by running games on high-end remote servers, taking in player input over the Internet and sending video and audio of the game back to the user. The company insists its proprietary technology makes the experience indistinguishable from playing on a local machine, but our tests found noticeable (though not unplayable) input and display lag when using the service.

Since its launch in June of 2010, OnLive has expanded from PC-based streaming to iOS, select Android devices, Google TV, and a standalone TV-based MicroConsole. Plans were in the works to bring the service to the upcoming Ouya console and a Vizio-made set-top box in the near future.

If true, OnLive's closure would be good news for Sony, which recently purchased OnLive competitor Gaikai for $380 million to gain a foothold in the cloud gaming world. Documents recently leaked from Microsoft suggest the company was discussing a possible purchase of OnLive at one point.

In May, Nvidia announced it was optimizing its GPUs for streaming games through an upcoming platform called GeFORCE GRID.