"We don’t expect an immediate impact [on console sales] (the service likely will be rolled out in early 2010), but think that if priced right, OnLive could favorably compete for 1-2 percent of the overall games market," he wrote in a research note analyzing GameStop.
OnLive's games are not actually installed on a computer--game data is relayed back and forth between the user's computer and powerful servers, marginalizing the importance of the power of a gamer's "rig" or the type of gaming console a gamer owns. A "MicroConsole" would allow users to play games on a television. The business model will be subscription-based.
The online, on-demand nature of OnLive cuts physical retailers out of the equation--the secondhand market that creates fat margins for retailers is also non-existent in such a model.
"We think that the adoption of a service like OnLive will impact retail," Pachter said. "As Internet console gaming grows in popularity, packaged goods sales and used game sales are expected to suffer.
"Again, we do not see an immediate threat to the GameStop business model, but believe that this service could ultimately cause GameStop sales to decline in the future."
OnLive already has the support of several major game makers: Electronic Arts, Ubisoft, Take-Two Interactive Software, Warner Bros. Interactive Entertainment, THQ Inc., Epic Games, Eidos, Atari Interactive and Codemasters. These publishers could find partnerships with OnLive more attractive than deals with retail.
Pachter said instead of 20 percent of a game's revenue going to retail, and another 20 percent going to the console manufacturer, "OnLive will likely charge around 30 percent (our estimate) of the proceeds, with the balance going to the publisher."