Can Wireless Gaming Pull Profits Out of Thin Air?

Can Wireless Gaming Pull Profits Out of Thin Air?

There are more questions than answers in the well-hyped but essentially unproven wireless gaming market, even though scores of old and new companies (THQ, Jamdat, Mforma, Activision) are pouring into the space.

After years of waiting, seeing, and simply licensing to wireless developers, Dave Anderson, director of business development and licensing, Activision, is investing more heavily in co-publishing and development deals because “Market conditions have come together. Carriers are spending quite a bit of money to upgrade their network. They have to figure out a way to pay that debt down. Data is a huge cornerstone for that model for them.” But is there a model for game makers?

Carriers, developers and publishers refuse to release current sales figures, so there is little hard evidence about actual consumer interest. “Nobody’s talking about it. Nobody’s saying anything,” says Mitch Lasky, CEO, Jamdat. And so, mobile game sales projections are wildly varied: Zelos Group says U.S. revenues will reach only $380 million by 2007, while Datamonitor pegs it at $3 billion by 2006 and along with Strategy Analytics sees global revenues exceeding $7 billion by 2007. And all of this largesse is to come from lowinterest, downloadable diversions that will sell for $3 to $7 a title and get played on devices that aren’t even designed for gaming.

Developers and publishers that are looking to place a bigger bet on wireless may want to check the odds first. In talking to all segments of this industry, realizing a decent revenue stream from mobile gaming seems to rest on a lot of “If”s.

If Consumers Play

On this platform, game makers are chasing the ever-elusive casual gamer, the one who has been playing mindless diversions for free on the Web for years but has not proven to be much of a paying customer. Forget grabbing hardcore gamers, say most observers. And while the carriers dream of users running up piles of mobile minutes on massively multiplayer contests, this is highly unlikely, say many analysts.

Publishers need to focus on classic properties for which the rules are already known. Not surprisingly, Sprint PCS’s top mobile game (and the easiest to play) is Tetris. “It’s about anti-productivity,” says Jason Ford, general manager, games, Sprint PCS. How much will people play for simple antiproductivity, however?

If Consumers Will Pay

JupiterResearch characterizes spending over the next two years on all types of mobile data in the U.S. as “chump change,” $100 million. Moreover, “the lion’s share of interactive content is going to be ring tones and screensavers,” says Billy Pidgeon, senior analyst, Zelos Group. Unlike Asian and European markets, Americans’ willingness to pay for premium content remains unproven. In fact, “the developers will suffer as the market evolves because of price competition,” says Nitesh Patel, analyst, Strategy Analytics. He suggests game makers negotiate a fixed fee per download rather than a revenue share, because in Europe he is seeing prices for premium content like polyphonic ring tones continue to drop rather than rise.

If Money Gets to Game Makers

All according to where a company distributes titles, mobile gaming money gets cut a number of ways by numerous hands before a publisher or developer sees a penny. According to Lasky, mobile carriers in Asia take 9% to 20% of the small game price, while U.S. networks take 15% to 30%, but European providers “are being greedy” he says, in taking a 40% to 60% cut. “They aren’t fundamentally understanding the need to create an ecosystem. The carrier has to incentivize us with great deals,” says Lasky. As a developer/publisher who deals directly with the carriers, Lasky sees the lion’s share of revenues on titles that he develops in-house, and among some of those he claims “at the moment I have ten products that are nearing break even.”

Publishers using mobile distribution platforms like Jamdat, however, are likely to see between 50% and 75% of what is left after the carrier takes its share. To make money at this, Anderson says, “It’s about scale, about getting more handsets into consumer hands and making sure you have a steady stream of content consumers will play.” If consumers take on the new technology as expected, Laskey argues, “When talking about an installed base of a half a billion units by 2007, you don’t need to get a great deal of penetration even at a dollar to see revenue.”

If Margins Stay High

More than scale, the model is also about keeping risk low: development costs of $25,000 to $100,000 a game typically and 6-week to 18-week small-team production cycles. But as the handsets become more robust, “budgets are going to start approaching GBA Advance budgets, which are up to half a million,” says Pidgeon. While Pidgeon himself thinks game prices will rise accordingly, most others do not.

“We’re probably going to see it reside in this price point for the foreseeable future,” says Anderson, because carriers do not want to be seen competing with other game platforms.

If Gamers Can Find Their Games

It is tough to browse 100+ titles on a cell phone to find the right game, so carriers will need to move beyond what Lasky calls “the flint tool level of online stores,” for titles to get noticed. Sprint PCS loads three titles onto its advanced handsets, but Ford says that when it comes to browsing for new downloads, “placement at this point in time is really key,” and that list is under the carrier’s control.

Getting carriers to license and bundle top titles with handsets could be the best bet for publishers. Regardless, in any model, “collaboratively working with the carrier is extremely important to create a point of difference from the competition,” says Anderson. His Tony Hawk Pro Skater 4 title did well in part because of co-marketing arrangements with ATT, which had a window of exclusivity on the title and promoted heavily in-store. Carriers could start exercising the kind of portal power Yahoo and AOL flexed years ago online, and smaller aggregators and publishers may not have the same clout as large game media brands to negotiate coveted positions.

And If The Herd Thins

“There are too many people chasing a finite pool of revenue,” says Joe Laszlo, senior analyst, JupiterResearch. Even Lasky admits that many dedicated mobile aggregators and developers are positioning themselves for eventual buyouts by the big boys. Pidgeon believes that publishers with bases or strong market presence in Japan will profit first, because the money is already flowing there. Not only does the wireless model seem to favor big brands, but if it generates a modest revenue stream then it might help the major game studios weather the inevitable sales drop-off as console players move from current-gen to next-gen platforms sometime in 2006. “This will never be more than 10% to 15% of the video game business,” says Lasky, “but it’s way more profitable than the video game business and it could be very interesting as a transition defense.”

If all things work as hoped.

Contacts: Dave Anderson, 310/255-2704; Jason Ford, 913/762-7071; Mitch Lasky, 310/636-3100; Joe Laszlo, 212/389-2037; Natesh Patel, Billy Pidgeon, 917/626-3480

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