OnLive, once touted as having the potential to popularize Internet gaming and threaten console makers like Nintendo and Microsoft, slashed its work force by 50 percent and shifted its assets into a newly formed company.
In an unusual restructuring effort led by Lauder Partners over the weekend, OnLive rolled assets from technology to trademarks into a newly created company and fired half its 200 employees. OnLive is backed by AT&T, Time Warner Inc and smartphone maker HTC Corp.
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"OnLive, Inc's board of directors, faced with difficult financial decisions for OnLive, Inc, determined that the best course of action was a restructuring under an 'Assignment for the Benefit of Creditors,'" it said in a statement.
OnLive, which allows users to play video games hosted on servers, similar to on-demand movie services, was rolled out in 2010 after being in development for seven years. Its deep-pocketed investors won it fans among industry insiders.
Silicon Valley-based venture capital group Lauder was the first investor in the newly formed company, which will retain the OnLive name and keep its services operating without disruption. An OnLive spokeswoman declined to provide financial details of the transaction.
Time Warner's Warner Bros studio, software service company Autodesk and Maverick Capital were other early investors in OnLive, which said it has 2.5 million subscribers. AT&T and Lauder invested in a later round in 2009.
OnLive's shareholders, employees and CEO Steve Perlman did not receive any compensation or stock in this arrangement, the company said. Perlman is a well-known entrepreneur who helped launch WebTV, which Microsoft bought in 1997.
OnLive said that the employees let go in the restructuring will be given offers to do consulting in return for options in the new company.
Sales of packaged games continue to shrink as new offerings on Web-based devices like smartphones and tablets attract gamers. Some industry watchers say gamers may increasingly switch to cloud gaming - which lets users play on the go or on multiple devices - from traditional consoles like the Xbox.
Sony Corp said last month that it would buy the privately held California-based gaming firm Gaikai Inc for about $380 million, to strengthen its own online gaming services.
Taiwanese smartphone maker HTC said it bought shares worth about $39 million in OnLive in February 2011.
"HTC estimates that it will need to recognize a $40 million provision for this investment loss," it said shortly after OnLive's announcement.