After months of rumors and speculation, OnLive’s gaming service launched last week and the era of cloud-based gaming begins.

There has been much debate around how cloud gaming can transform the traditional video game business, turning game players from buyers into renters and making video game consoles like the PlayStation and Xbox obsolete.

Much less has been discussed on the impact on casual games. Cloud gaming has the potential to revolutionize the casual games downloads business and to fix all that ails it. That is, if companies like OnLive realize that the real opportunity for cloud gaming is in casual games.

Cloud gaming enables users to play a game without downloading or installing the game on your computer. Instead, you access the game that resides on a web server (“in the cloud”), much like you access photos on Facebook’s servers or mail on Google or Yahoo!’s servers. All your game progress and statistics are stored on the server and you can access your game anywhere.

This may sound complicated and technically, it is. But, as a gamer, it’s unbelievably simple. You open your web browser, click on a button, and voila, you are playing a game. I’ve been playing with OnLive for the past week and so far, it works like a charm.

It’s this simplicity that makes cloud gaming tailor-made for casual gamers, which is relatively older and less techie than hard-core video game audience.

Compared to cloud gaming, the try-it-and-buy-it model that dominates the market today is complicated and inefficient:

  • Game developers have to design and test their games for multiple PC and game cards configurations.
  • Gamers have to download and install the entire game (on average, between 100 M – 1 G), regardless of whether the buy the game or not.
  • The average conversion of trial to purchase is 1 – 5%. Even if it was 10% which some companies claim for particular hidden object games, that means at best 90% of all download games are not earning the developer one penny. In any other business aside from casual games downloads, this would be considered abysmal.
  • If you do belong to the 1 – 5% that purchases download games, it’s likely the game will only work with one computer because of the DRM, which is inconvenient if your hard drive crashes or if you buy a new computer.

Cloud gaming fixes a lot these problems:

  • Because the game is stored on a web server and not millions of different computers, there are less customer care issues. Developers only need to make game work once to be played everywhere. If the game has a bug, the developer can update the file on the server and automatically patch it so that the player does not have to re-install the game.
  • Players can try out a game within seconds with the click of a mouse without having to download and install the entire game, making it easier to try games before purchasing.
  • Once you purchase the game, you can play the game on any device you like, including your PC, Mac, or even TV (if you have the right equipment).
  • Right now, the try and buy downloads model is one size fits all. You wrap it once with a set free trial period (30 minutes, 60 minutes) and you have to re-wrap to make changes. With cloud gaming, the free trial can be customized on the fly based on the type of game and the player’s gaming behavior. The cloud game service can make instant offers (buy this game now, get this similar game free) that could lead to more game purchases and higher revenues for game developers.

In short, cloud gaming has the potential to decrease customer service costs, increase game sales, make the market more efficient, and improve the gamer experience. It can change the world of casual games as we know it.

Unfortunately, I don’t think OnLive realizes this just yet. At best, they are marketing the service initially at the hard-core video game early adopters. At worse, they don’t get casual games.

The service is easy but is not designed with the casual gamer in mind. At launch, there are only two games that I would consider casual — World of Goo and Twine – and they are more indie than casual games. There are no hidden object, adventure, time management, farming or puzzle games yet that appeal to mainstream casual gamers.

Pricing is another issue at launch. OnLive announced that the first 12 months of subscription service will be free and $5/month consequentially (though personally, I think there is enough competition already that there will never be a subscription fee).

However, you still have to purchase to rent or own the game and those prices are relatively higher on OnLive than on casual game sites. A casual gamer (or anyone who knows how to use Google) is not going to purchase a year-old casual game for $20 when they can get it for $7 within a club or even $2.99 if you find a daily deal online.

It’s almost as if OnLive (or to be fair, it’s competitors) have not looked at the slew of successful casual games sites when they designed their service.

Which is a shame, really, because casual games have proven time-and-time again to be the driver of all great paradigm shifts in gaming. Nintendo, Apple, and Facebook have all revolutionized the gaming market by embracing casual games. Moreover, casual games are better content for cloud gaming services than hard-core video games because there are less latency or lag issues.

Fortunately for casual gamers, someone besides me is going to figure out that casual games and cloud gaming are a match made in heaven. OnLive just launched their service and I highly suspect casual games have to be on their radar screen. There is already lots of competition in cloud gaming (OnLive, Gaikai, Virgin) and many casual game companies today exhibit features of cloud gaming (Exent, Wild Games, Steam) and/or are as a few steps away from entering the space (in the case of Exent, they have been doing Games on Demand games streaming for years).

It’s only a matter of time before someone gets it and when they do, the casual games market will change forever.

It’s not a question of if cloud gaming will change the casual games downloads market forever, but when. Cloud gaming has the potential to replace the try-and-buy download model that dominates the market today. Mark my words – once you have played a casual game in the cloud, you may never want to download and install a game ever again.