gaikai-1Playing video games on demand, or over a server connection instead of installing a game on your own machine, has become the hot topic of the game industry, not only because it threatens to cut retailers out, but also because it lets gamers play any game on any kind of computer.

The competition is heating up today. Gaikai, a startup in the space, has released a video showing how gamers could play any PC game on a Gaikai server without installing it on a home machine. Usually, games have to be installed on a computer because games require fast interaction and can’t depend on connecting to a distant server and getting a fast enough response. With games played on servers, the home computer simply functions as a display.

David Perry, chief executive of Gaikai and a famous game developer, first talked with us about this server-based game technology in March. That was just after OnLive, a well-heeled startup headed by entrepreneur Steve Perlman, showed its technology working during the Game Developers Conference.

These startups have met with skepticism, since delivering excellent application performance — particularly for heavy-duty apps such as games — is extremely difficult on the Internet, which is pretty patchy in terms of service quality in the U.S. Doubts have been raised about Gaikai in particular since it isn’t as polished as rivals OnLive or Otoy, a Los Angeles-based rival. But Perry said in the video, “I just want people to see we are serious.”

“Our goals are really simple, to remove all the friction between hearing about a game and trying it out, to help reduce the cost of gaming, to grow video game audiences, to raise the revenue that publishers and developers can earn, and (most importantly) to make games accessible everywhere,” Perry said. “If the iPhone AppStore has taught us anything, [it’s that] when you make it easy to check things out, you get a billion downloads.”

Perry didn’t reveal Gaikai’s business model. But the advantages of playing games stored on servers and not on home computers are myriad. First, gamers can buy the games on the spot and play them almost immediately. The gamers can also play high-end games on relatively low-end hardware. Perry said gamers could use Gaikai to play high-speed racing games such as Need For Speed on low-performance netbooks (web computers which are smaller than laptops). Since retailers aren’t involved, the games could either cost less or publishers can keep more of the money. And gamers never have to download patches or other upgrades. They just need a decent broadband connection to be able to play. That opens even hardcore games to a broader audience.

As the Internet and technology for delivering games gets better, video games on demand is in some ways inevitable. Atul Bagga, an analyst at ThinkEquity, said in a recent report that he believes gaming will be like other industries moving from packaged goods or web site delivery toward a service. In that sense, he says games as a service will cross multiple platforms and have multiple channels for distribution.

david-perryGaikai is far behind its better-known rival, OnLive, since OnLive has been working on the problem for seven years. OnLive is preparing to launch this fall and has nine announced publishers as well as backing from Warner Bros. Interactive Entertainment, Maverick Capital and Autodesk. Perry hasn’t announced funding for Gaikai, while Otoy has an announced relationship with Advanced Micro Devices. OnLive has more than a hundred employees, while Gaikai has a handful. Perry did not show some of the most demanding games, such as Crytek’s Crysis, running on Gaikai, while OnLive has shown that.

Gaikai still has to prove it can offer its service to a mass market. Perry said he’s still seeking investors, Internet service providers to host Gaikai, and game publishers. He’s also seeking gamers to join a closed beta test.

Still, the demo by itself is impressive. Perry said he can run a game across a server that is not running a Microsoft operating system. He showed the games being displayed on a Windows Vista computer with the latest Firefox web browser and Adobe Flash installed.

Perry said the games can run on less than a megabit a second of Internet bandwidth. Most DSL connections offer around three megabits a second, coming downstream into the home. In the demo, Perry said, the server was about 800 miles away, which results in a round trip (ping rate) of 21 milliseconds. That’s a split second and not really noticeable. For a server much closer, the ping rate is about 10 milliseconds. While both OnLive and Otoy used custom servers with graphics chips, Perry said his service can run across low-end custom servers.

Perry contends the ping rate is fast enough to play most games. He showed racing games such as Mario 64 and other games such as World of Warcraft and Eve Online, all playing without downloaded software. He also showed how he could use Adobe Photoshop across the server.

Jules Urbach, chief executive of Otoy, says he is friends with Perry and that the two rivals have been mutually supportive about getting the technology into mainstream markets. He says that server-based computing is a “game changer” and that, as disruptive as it may be, “we are seeing much of the industry embrace it.” Like Perry, Urbach believes that server-based games are just the tip of the iceberg and that Perry’s Photoshop demo hints at where the technology is heading.

In a jab at OnLive, Perry said, “We don’t claim to have 5,000 pages of patents, we didn’t take seven years, and we do not claim to have invented 1 millisecond encryption and custom chips. As you can see, we don’t need them, and so our costs will be much less.”

Perry said the service was demoed live at E3, but I didn’t get a chance to see it there. Is he credible? Well, his games such as Enter the Matrix have sold about $750 million worth to date. But he is clearly years behind his chief rival. The question is whether the market will support lots of players.

Perry said he will talk about the company’s business model at upcoming game conferences: Develop and GDC Europe. But in an email today, he elaborated some. He said he doesn’t view Gaikai as directly competing with OnLive. For instance, he hopes that Nintendo and other console makers would work with Gaikai. Nintendo could use Gaikai’s technology to put a Mario Kart game on so that people could play it on the web and then invite their friends into a race via a simple Twitter message.

Perry said he believes that casual game sites around the web — as many as 20,000 of them — are hosting games that the console game publishers never cash in on. If there were a way to put console games on those sites, then the console games would be freed from the platform constraints and reach a much larger audience. Game review sites could also write about games and then readers could click on a button and conveniently try out the game — maybe on a 48-hour time limit — before they decide to buy it. Game ads could thus be much more effective at getting gamers to try out a new game. In this way, Perry thinks the company’s thinking on a business model is very advanced and that it could go a long way toward expanding the market for games, rather than just competing head on with console makers.

Gaikai Technology Demo (JULY 1, 2009) from David Perry on Vimeo.