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“The new company is hiring a large percentage of OnLive, Inc.’s staff across all departments and plans to continue to hire substantially more people, including additional OnLive employees. All previously announced products and services, including those in the works, will continue and there is no expected interruption of any OnLive services,” the company said.

OnLive said initial reports on the situation at the company were “way overstated,” but the company could not respond until the transaction was completed. The management team remains intact, but no further details were released. (original story continues below)

OnLive, a cloud gaming startup that promised big-budget game titles streamed to a TV or computer, is now denying rumors that it is shutting down and laying off its workers. It all started following an email reportedly sent by an OnLive employee who told veteran video game developer Brian Fargo that the staff was being laid off and the OnLive service would be shut down with a new company formed. The employee, however, then tried to recall his sent email.

Mashable quoted a source close to the situation who said the staff was fired at a company meeting, with some of the employees potentially rehired as the company transitions to something new.

UPDATE: Joystiq is reporting that the company has been sold to a third-party and that at least 50 percent of the staff was laid off. A former employee told Joystiq that employees were not getting severance and that OnLive was dealing with operating costs of $5 million a month. There’s at least one report of OnLive employees leaving the office with moving boxes.

I reached out to OnLive PR and was told by spokesman Brian Jacquet in an email that: “My comment is no comment on the news other than to say the OnLive service is not shutting down.”

That still leaves a lot of wiggle room including the potential that the service has been bought by another company. OnLive has been rumored to be an acquisition target of Microsoft or Sony in the past. Sony eventually bought OnLive rival Gaikai.

Some citics and competitors have wondered whether OnLive’s business model was sustainable. TransGaming CEO Vikas Gupta questioned whether’s OnLive’s fluctuating operating expenditure and performance concerns would be able to hold up over time. That’s a key question because the company is required to make big investments in data centers to support its streaming service.

Mashable said the company has turned down acquisition offers in the past and now may be only viable as an intellectual property play based on its cloud patents.

The company has been inking deals lately including with Ouya, the TV game console Kickstarter project. The company’s Twitter account is still pushing out updates on product news.

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Sony announced the news early this morning, saying it was planning on building a cloud service that provided users with new gaming experiences. There were rumors in May that Sony was interested in working with Gaikai or its rival OnLive. Last month, Fortune reported that Gaikai was looking to sell for $500 million. Now that Sony has followed through and bought Gaikai, it raises some interesting questions about what its hardware future looks like.

Initially, the cloud service could quickly be integrated into the PlayStation 3, its successor the PS4 and the Vita, allowing users to access games without a download. Users could access, for example, older PS1 or PS2 titles from the console and the Vita handheld device. But the purchase of Gaikai could also alter Sony’s future hardware plans, putting less emphasis on powerful systems and more focus on a cloud platform that could bring PlayStation games to a wide array of devices. It could be Sony’s equivalent of “TV Everywhere”: Gaikai could connect to Sony smartphones and other mobile devices including tablets, and it could power gaming for a lot of TV makers.

Gaikai already has deals to bring gaming to TVs from Samsung and LG. It’s unclear how those deals will work now that Gaikai is owned by a rival. We’ll have to wait for more details from Sony and Gaikai, but the potential exists for Sony to depend less on big consoles and all the costs those incur. Having Gaikai means that the PS4 and the Vita would not have to be followed so closely — if ever — by another piece of console hardware.

That would be a big shift for Sony, which has traditionally invested in some of the most advanced gaming systems. The PlayStation 3, for example, was incredibly robust with its Cell Processor but the high specs came with $600 price tag and also took longer to hit the market. That ultimately hurt sales and forced Sony to play catch up against Microsoft’s earlier-to-market Xbox 360. Now, Sony can start to contemplate a future in which it doesn’t get hung up on those issues. Users could play the latest games from Sony’s data center with the titles streamed instantly to users. That’s the promise of cloud computing in which most of the heavy lifting happens in a data center.

The deal will no doubt heat up speculation about OnLive, which is also rumored to be an acquisition target. Gaikai had raised $45 million from Benchmark Capital,  TriplePoint Capital, Rustic Canyon Partners, Limelight Networks, Qualcomm Ventures , NEA and Intel Capital.

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Japanese cloud-gaming and VOD startup G-cluster plans to enter the U.S. market with an on-demand mobile gaming service, presenting a possible challenge to OnLive. The company has secured an unnamed amount of funding from Intel and Vivendi’s French mobile carrier SFR to expand its reach beyond home casual gaming and movie streaming into high-end gaming for tablets and smartphones.

G-cluster has already established itself in France, providing a casual gaming service through SFR’s residential broadband arm that customers can access through their TVs and set-top boxes or on their Macs or PCs. In Japan, G-cluster is offering an HD movie-on-demand service to connected TVs. But according to Sevan Kessissian, G-cluster VP of Content and Strategy, the startup has bigger ambitions than just casual gaming and video in the domicile. It plans to combine the processing might of the cloud and low-latency, high-bandwidth connections of new wireless networks to create a mobile service that supports high-quality, real-time gaming to tablets and other mobile devices. And it plans to launch that service in the U.S.

“We are in discussion with major partners in order to penetrate the US market” Kessissian said via e-mail. “The game catalogue will be a blend of the best casual games and AAA games.”

Kessissian didn’t provide any details about which partners G-cluster is in discussions with or when such a U.S. service would launch, but when it finally does emerge here it may find an already established competitor in the market. In December, OnLive announced its mobile gaming service for iOS and Android devices.

My colleague Kevin Tofel reviewed OnLive’s mobile beta on the iPad, over both Wi-Fi and 3G, and was particularly impressed by its performance when hooked into his home network connection. As Kevin pointed out in earlier post, virtualization services like cloud gaming to the tablet and smartphone are proliferating, delivering one more blow to already suffering PC sales.

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Happy Cloud, which is launching Monday in a semi-private beta, is the brainchild of Jacob Guedalia and his brother David Guedalia, who founded iSkoot, the mobile communication app start-up which Qualcomm purchased last year . The Happy Cloud service works by tapping the cloud to get AAA games running within minutes while downloads are completed in the background. Video services have done this for a while, but it’s been harder to do this for video games because they’re not linear, but are interactive. Happy Cloud achieves this by using a virtualized file system to pre-install a game in the cloud, eliminating the need for a user to go through an installation process. Consumers just load up Happy Cloud on their PC one time and then when they buy a game, the service begins sending the data in the order it’s needed so players can get started right away instead of waiting for the download to be completed.

Instead of waiting a few hours or more to download a large title, gamers can be up and running quickly, opening up the potential for impulse buys. And it offers the ability for gamers to try before they buy. Happy Cloud said a typical 8.5 GB game can be played in 4.3 minutes on a 10 megabit per second connection, compared to more than two hours for a complete download.

“If you can get it now or later, why not get it now?” asked Jacob Guedalia, who is still working at Qualcomm.

Guedalia said this is the way to best use the cloud to deliver video games. He said cloud gaming efforts will run into problems paying for bandwidth and reducing latency, but downloads offer a host of benefits, especially if you can make the pay-off immediate. Gamers can own the game without any loss in resolution, and they can play offline if they want. And there are no concerns about broadband caps or latency. These are similar issues as those raised by critics of streaming video services.

Happy Cloud has lined up gaming publishers Warner Bros. Interactive Entertainment, Frictional Games and Paradox Interactive as launch partners. Publishers will be able to offer their games through Happy Cloud with no effort. The upside for publishers is they can remove much of the lag involved in downloading a game, providing something akin to a cloud-gaming experience complete with free trials and try-before-you-buy offers.

For now, Happy Cloud plans on offering games on a per-download basis at prices similar to competitors. Within the next 90 days, it’s looking at offering rentals and subscriptions. The service can also work for console games, which is something Happy Cloud is hoping to enable later this year. Games, however, won’t be available on the first day they become available on other download sites, because it takes about a week for Happy Cloud to index a game and optimize it for fast downloads. That could be a turn-off for gamers looking to get into games immediately on the first day of availability. But the hope is that it could still be helpful in convincing many gamers to try a title, similar to the way people pick up flash games.

UPDATE: Happy Cloud said it does take time to index a game but the company expects to have early access to games like other download services so they will be able to offer games on day one of availability.

Happy Cloud has raised $1 million so far from Jesselson Capital and Miles Gilburne, a former Warner Bros. board member of Time Warner Inc. Guedalia expects competitors to try to copy Happy Cloud, though he claims to have solid patents and a four-year head start on the field. Guedalia said Happy Cloud is open to licensing the technology to other digital download providers. If Happy Cloud proves successful in driving downloads, it could be an appealing pick-up for any number of online retailers or gaming publishers. I have my doubts about a solution that aims to speed up downloads but will not be able to offer games on the day and date of a big title release. But I think that it’s got some good ideas, trying to blend digital downloads with some back-end cloud work to satisfy the increasing on-demand expectation of consumers. We are still waiting to see how OnLive and Gaikai perform over time but Happy Cloud could be a good alternative.

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