Cloud gaming isn't really cloud gaming, but it's already set to be a huge business in 2012, and of huge benefit to enterprise computing. What companies like OnLive, which should be one of the hottest IPOs of next year, are doing is Software as a Service (SaaS), much like Salesforce.com (CRM). They happen to be hosting these applications on cloud platforms.
There are valuable, working business models for online gaming, developed over many years. (Steve Perlman has been running OnLive since was spun-out of a business incubator in 2007. ) The company has lately been swimming in investment from big entertainment players anxious to pick up on its “special sauce.”
You can either take games free, as Zynga (ZYNG) has been doing to enhance the value of Facebook for years, or you can charge real money for game play, which role-playing games have been doing for a decade. (Second Life has been doing this for almost a decade, while kids around the world have been playing offshoots of World of Warcraft.)
It's the economics of hosting on cloud platforms that has changed the game.
Suddenly, if you have a mobile platform, “cloud gaming” is the way to make it competitive. (Never mind Apple's (AAPL) apparent reticence to embrace the change – that's a negotiating stance.) Google sees games as a way to push browsers, other companies see it as a way to push gambling onto the street.
Gaming is, if anything, a better application of cloud technology than TV, although technically it's quite similar. Look for anyone now doing TV streaming to seek a way in. (Cough, NetFlix NFLX, cough.)
The question is, how do you play the hot new trend?
I think the safest way to play is through the hosting companies. Cloud hosts will be able to leverage cloud gaming into stronger positions as enterprises move to cloud computing. The lower costs structures enabled by scaling cloud gaming will, through an improved geographic footprint, keep some enterprises from building their own clouds, and improve cloud hosting in the enterprise space.
All of which means the best bets here are Google (GOOG), Rackspace (RAX), Amazon.Com (AMZN) and (yes Virginia) Microsoft (MSFT). Of that group, it's actually Microsoft and Google who are best leveraged, having relatively modest PE multiples that can expand with big cloud business. RAX and AMZN are still very expensive, but as they come down look for a way in, because this will benefit both of them.