Imagine playing the most demanding PC and console games for a flat subscription fee on your older computers or flat screen TV. That means you could play games with the best graphics, regardless of whether you have a state-of-the-art gaming rig.

Sound impossible? It’s what OnLive (www.onlive.com), a start-up in Palo Alto, promises with its videogames on demand service that’s set to debut this fall. The company spent seven years secretly developing the service and unveiled a prototype at the Game Developers Conference in San Francisco in March. OnLive could disrupt the game business in a big way, as it means gamers can play games purchased over the internet rather than paying for them in stores.

I tried out OnLive by playing Crysis (one of the most attractive looking first-person shooter games ever created) on an old MacBook laptop. It had all of the special effects (shimmering water, solar flares, and realistic shadows) that usually only run on high-end gaming computers. OnLive also lets you engage with other players socially. You can capture your own performance in a game and make “brag clip” that you can share with friends. You can also watch some of the best players in the world as they play their games live, so that you can get tips on how to beat the hardest parts of a game.

All this is possible because OnLive has figured out how to compress game data by more than 200 times. It can store the game and perform computations in computers known as servers in centralized data centers. When you push a button on a controller, the command is sent over the internet to the servers, where the action is calculated, and then the result is sent in the form of a video image to the display in the home. You can use an old computer to do this, or you can use an OnLive “micro-console.” The micro-console has a port to plug in your display (such as a flat screen TV) and a way to plug in the internet. You can plug a game controller into it – and that’s all – you don’t need a home console at all.

You will pay a flat subscription fee when the service debuts in the fall. To play, you need an internet connection with at least two megabits a second bandwidth for standard definition games. To play high-definition 720p games, you need about five megabits a second bandwidth. Most cable modem and digital subscriber phone lines can handle these speeds. You might notice an occasional hiccup, since the game is being processed on computers so far away from you, but the quality is expected to be pretty good.

There are many upsides to playing via OnLive. For game publishers, there is no threat of piracy, as each person is authenticated when they log into the servers. Game publishers can also upgrade their games easily, eliminating the need to send patches to home computers that users must install. Which means game publishers could change their games overnight, giving gamers more reason to log in the next time they play. Gamers can also play their games on any machine, even while they’re traveling, since OnLive takes only a small one-megabyte download to install. You could even play some of the best games on a $400 netbook.

At least nine major game publishers are backing the idea, while OnLive has funding from Warner Bros. Interactive Entertainment, Maverick Capital and Autodesk. It is certainly one of the biggest bets made on a start-up in recent Silicon Valley history. If it succeeds, imagine how OnLive will use the same technology to transmit movies, music and other entertainment into our homes.