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Cloud-based game service OnLive has raised $40 million from Taiwan’s HTC, one of the fastest-growing makers of smartphones.

The announcement is a huge boost for server-based gaming, which promises to disrupt traditional game retailers and game consoles. It also shows that it will be possible to play the highest-quality games on mobile devices.

OnLive is engaged in a huge expansion onto many different platforms for its games-on-demand service. The company launched on the PC in June, spread to the TV screen via a MicroConsole adapter in December, and announced it would be built into Vizio TVs in January. Now the company says its games on demand will be available on HTC phones.

The announcement was made by HTC in a filing with the Taiwan Stock Exchange, where HTC said it would buy 5.33 million shares in privately held OnLive at $7.50 a share.

Palo Alto, Calif.-based OnLive was founded by serial entrepreneur Steve Perlman. He invested in the technology for nine years before launching the service last year using internet cloud technology. Perlman said that OnLive games will definitely be playable on HTC mobile devices. We hear that the HTC EVO (pictured below) will be able to play OnLive games.

OnLive offers instant gratification with its games-on-demand service. Users log into OnLive and immediately play games that are computed and stored on OnLive’s data centers. Users don’t have to download anything and don’t need a high-end computer to play high-end games. So far, OnLive has been offering a la carte game sales and game rentals. Since OnLive focuses on digital distribution of games, it can disrupt retailers such as GameStop and put more profits in the hands of game publishers.

“In a world of mobile internet ubiquity, content is king, but it’s not all created equal,” said Peter Chou, chief executive of HTC. He said that he and OnLive share a goal of creating connected, cloud-based gaming that can be wireless and location independent. That means they want to create the ability to play games anywhere, anytime.

OnLive’s other investors include Warner Bros., Autodesk, Maverick Capital, AT&T, British Telecommunications and The Belgacom Group. The company was founded nine years ago and has 200 employees. Because its technology is potentially disruptive to traditional game retailers, investors valued the company last year at $1.1 billion. It isn’t immediately clear how much OnLive’s value is now, after the HTC investment.