Industry observers are watching closely as a new online game streaming service steps up to challenge the game console industry for supremacy in the gaming sector.

OnLive, a start-up backed by WebTV founder Steve Perlman and former Eidos CEO Mike McGarvey, will digitally distribute first-run, ‘AAA’ games, from major developers including Electronic Arts, Take-Two, Ubisoft and Atari, at the same time as those titles are released at retail.

Users will be able to stream games on demand to any Windows XP or Vista computer or any Intel-based Mac. They’ll also be able to stream games to a TV set using a small plug-in device. An optional custom wireless controller and VoIP headset will be available.

The OnLive system relies on proprietary compression and streaming technologies that have been seven years in development. The company says almost any PC running a compatible operating system will allow ‘seamless’ play — provided users have a minimum 1.4 Mbps Internet connection for regular play and at least a 5 Mbps connection for Hi-Def play.

While OnLive has not yet revealed details of its business model, industry observers are betting on some sort of subscription setup.

OnLive is currently in a closed beta trial but is expected to go live in a public beta test this summer and launch for real sometime late this year.