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The Evolving Games Industry: 2. The birth of mobile gaming
March 2003
Introduction
Although it may be considered, with some justification, an over-generalisation, we break
the wireless gaming market down into two distinct areas for the purposes of our analysis: (hard core) portable gaming and casual mobile gaming. Whilst the former, portable gaming market has existed for over 12
years and represented around 10% of the global games software market in 2002, it is the former market that is the core focus of this research article.
Following a number of false dawns (WAP, SMS), mobile gaming is, we believe, currently re-launching with
technology and a structure that are, for the first time, capable of supporting sustained, strong value growth and which finally has the potential to become a very substantial industry. For this reason, we view this
period as the "birth" of mobile gaming.
Definitions
Before proceeding we need to define what we mean by casual mobile gaming and (hard core) portable gaming:
The casual mobile gaming market will comprise a mass-market demographic (near 50:50 gender split) that sees
gaming on the go as a time-filler and for whom intuitive and attractive interfaces, well-known brand names and instant gameplay gratification are key to demand. Monochrome screens, SMS and WAP
technology are simply not capable of providing this mobile games experience and the casual gaming market has failed to develop meaningfully as a result. However, the arrival in European markets at the end of 2002 of
handsets featuring colour screens and operating systems capable of supporting game downloads finally gives the market the potential for significant commercial growth.
Successful mobile games will tend to be simple and addictive whilst reward-based games (such as quizzes with cash
or other prizes) should also prove appealing. Multi-player gaming will be limited to turn-based gameplay and will be joined by mass participation gaming (where players do not necessarily compete directly with each
other but still play the same game) and high score submissions/high score-based tournaments. Real-time multiplayer gaming will not exist on mobile networks for the foreseeable future; the architecture of GSM, GPRS
and most early-stage 3G networks prevents latency in a real-world setting of less than around 400ms, well above the 150ms or so needed for playable real-time multi-player interaction.
Most mobile games will comprise short-duration experiences so the standard charging model will be pay-per-play or
a one-off, manageable download charge. It is essential that these charging mechanisms are as invisible as possible to the end user, being kept to a yes/no decision (i.e. "This game will cost £x. Hit yes to proceed")
if not done on an "un-stated but understood" basis (as SMS is today) and fully tied into an existing billing system relationship. This is a subtle but surprisingly effective marketing trick to both reduce the
instances and reasons to say no to the transaction as well as to hide the financial effects of single small transactions until a later stage when they are collated and their negative effect diluted within an
existing phone bill.
The (hard-core) portable gaming market is currently dominated by Nintendo. We have added the expression "hard core" simply to
clarify the fundamental differences between the two categories. The demographic focus within this market tends to be considerably narrower and younger than with casual gamers and games tend to be more complex,
requiring more sophisticated (and expensive) hardware. Portable gamers will be less likely to pay on a pay-per-play basis, preferring a higher one-off up front price as "hard-core" games tend to be more
involved, take longer to get into and complete and have higher production values that can justify (and often necessitate) the larger up-front charge. This market is largely retail-led with games delivered on
physical media rather than wirelessly over a cellular network. Due to the physical nature of the media and high accompanying software prices, a conscious, considered decision has to be made by buyers to make a
purchase within this market, with casual purchases much less common.
Whilst there will clearly be instances of product and company cross-over, we believe that for the next five years
at least, the two markets will develop separately, with different value chains, technologies and customers. This will result in portable and mobile gaming offering substantially different opportunities.
The opportunity
Despite having to contend with a variety of pretenders to its crown, Nintendo has
dominated the portable games market since its inception. Nintendo has achieved this through a combination of regular "must-have" software releases and superior market momentum. Nintendo's current standard is
the Game Boy Advance, launched in Q1 2001, which has a global installed base of over 30m units and has averaged around 3 software purchases per hardware unit to date. As an indication of the addressable market for
portable gaming, lifetime sales of the whole Game Boy range has now topped 120m hardware units although this takes no account of cross-over or multiple unit buying. Nintendo hopes to consolidate its dominant
position in the portable gaming market with the launch of the Game Boy Advance SP, essentially a GBA with a new folding form factor and backlit screen, in March 2003. We estimate that the portable games software
market represented over $1.7bn in 2002 with Nintendo not only dominating hardware sales but also leading software sales within the portable gaming category.
Whilst software sales certainly grew in 2002, the low tie-ratio has surprised many within the industry and the
best-sellers from third party publishers have tended to be franchise and brand-driven successes. This has led to a degree of disenchantment amongst some publishers and a number of the development company
liquidations that have taken place in Europe during 2002 and 2003 (see Thinkpiece: Developments in Development) have been as a direct result of publishers scaling back their Game Boy Advance development budgets. The portable games market is being targeted by Nokia with its dedicated wireless games device, the
N-Gage. Our analysis of the N-Gage proposition can be found here.
The casual mobile games market, on the other hand, has the potential to represent a considerably larger
opportunity. Whilst the addressable market for portable gaming could feasibly extend to around 150m users and $2.5bn-$3.5bn over the next 10 years, we believe that the addressable market for casual gaming is only
limited by the number of mobile gaming compatible handsets sold (expected to exceed 150m/year by the end of 2005) and has considerably better economies, and lower barriers to growth. Portable gaming certainly offers
higher average revenue per user but mobile gaming offers the potential to hit a breadth and depth of customer base that console manufacturers can only dream of. And the early indications are sufficiently positive to
believe that forecasts of $4bn+ for mobile gaming can be reached within a 5 year time frame. More on why this is so later.
Mobile Games Value chain
The mobile games value chain already looks markedly different to the portable
and traditional video games value chains and although it will likely evolve as mobile gaming services mature over the next few years, we do not believe that the fundamental differences, such as billing, customer
ownership and content distribution channels will change. Unlike the portable games market with its hardware and software publisher concentration, the casual games market is likely to be highly fragmented with
multiple mobile gaming technologies and standards, and a mass of service and content providers.
At the base of the value chain will be mobile content developers whose services will become (if they aren't
already) highly commoditised unless they can secure valuable games IP or third party brand rights. Whilst the market will not preclude successful original IP, the undiscerning mass-market demographic that will
comprise the bulk of casual games players will likely take to known brand names before other products, especially if they are paying to access the content. The cost of developing a typical phone-suitable java game
is less than £40,000 and due to the limited nature of the hardware the content is being developed for, the skills barrier to entry into this market is minimal. This has already led to an oversupply of mobile games
developers, a situation that will be exacerbated by the influx of games from the Far East, where such content already exists in abundance. In addition, IP and brand rights will be sought by nearly all companies
within the value chain and the most valuable will ultimately end up with the largest players. Interestingly such IPR prices which peaked around 2 years ago at the height of the WAP bubble and collapsed shortly
thereafter will likely start to accelerate upwards again as companies realise the potential this new market offers.
The roles of aggregation, publishing and distribution will fall to a variety of companies although it is likely
that, outside the operators, the more successful companies will provide all three. The model is likely to follow that of the ring tones and wallpaper market with operators, billing companies and handset
manufacturers' content being supplemented by third party content providers making use of premium rate numbers to disintermediate all three. Clearly, the operators, billing companies and larger manufacturers will be
in strong position to exploit their customer base but the ease with which content can be downloaded to handsets will lead to a highly competitive third party content market. To defend against this and to increase
their ARPUs, network operators have already begun to launch carefully controlled content services such as Vodafone Live, which borrow heavily from the successful mobile content model established in the Far East. A
key feature of these services is the close integration of the phone menus with the network-based content offering allowing easier access to and selection of paid-for content and will, in future, allow other revenue
generation opportunities such as direct marketing. If this is presented to users in a sufficiently controlled, intuitive and appealing way, the operators stand to carve out a substantial portion of the market as
users may not feel the need, or be technically able, to access third party content. As such, success for third party mobile games publishers may well be dependent on the degree to which they can secure distribution
on the major operator services.
An interesting question is when the major video game publishers will start to make moves towards this market.
Some, such as THQ and Midway, have been operating within the mobile gaming market for several years but with, not surprisingly, limited success and it seems unlikely that there will be a significant ramp-up in video
game publishers' mobile gaming efforts until firstly, average mobile handset hardware is capable of supporting a quality level similar to that of Game Boy Advance (2004/5 at the earliest) and secondly, there is a
large enough installed base to deliver a meaningful return on their investment. Quite what constitutes a large enough installed base will vary from publisher to publisher but their decisions will be based on not
only the size of the installed base but also the effective addressable market within that installed base and the value per gamer that can be expected. Their decisions (as well as the market's overall development)
will also be largely affected by the prevalence, or not, of common handset and server standards. Many publishers will simply not entertain the thought of entering a market where a game has to be re-written for
multiple operating systems and multiple handset configurations.
However, once they decide to enter the mobile gaming market in force, the existing mobile games publishers will
come under significant competitive pressure. Traditional video game publishers will bring with them higher quality development resources, more extensive games publishing experience and, most importantly, existing
internally owned games IP and greater potential to leverage their existing third party licensed IP within the mobile games market. For example, it will make more strategic and economic sense for a Hollywood film
rights holder to licence a film's games rights for all gaming platforms in one deal (to allow synchronised development and unified marketing) than piecemeal. Interestingly, some of the larger games publishers have
started to include mobile games platform rights within their standard third party IP development agreements and this trend will only accelerate.
A variety of technology intermediaries already populate this nascent market, offering mobile gaming platforms,
API sets and SDKs (e.g. TTPCom, Renderware, Superscape, In-Fusio) OS and Java enhancements (eg. Tao Group) and back-end mobile games infrastructure solutions (e.g. Openwave) and others will likely join the fray.
Some are extensions of publishing or development operations whilst a few handset manufacturers have also entered the intermediaries market with Nokia and Motorola both developing client and infrastructure solutions.
Given the limited penetration of colour and download-capable handsets, it could be argued that these companies are a little premature, but their role in providing common platforms and compelling advanced features
will become crucial.
Success within this market is considerably more difficult to predict as the choice of partners for the operators and handset manufacturers (whose broad customer ownership represents both the biggest opportunity and the biggest barrier) will be made based on a large number of factors including cost and technical merit but also corporate strategy and, even less predictably, industry politics.
Value Creation in Mobile Gaming
Our confidence that the market has finally got mobile gaming right
stems from a variety of sources. Firstly, the early usage indication for java colour game downloads (which have typically cost between around £2.50 and £5) on advanced mobile content services in Europe during their
first 6 months is overwhelmingly positive with not only substantial download volumes (relative to the installed base of phones/users) but also a price-demand elasticity that will greatly encourage content
developers. However, this should not come as a surprise to those that have followed the success of mobile games in the Far East, and in particular, in Japan where advanced mobile content services (such as i-mode and
J-Phone) have demonstrated that with the right interface, hardware and content promotion, mobile gaming can be highly lucrative. For example, Sega and Bandai both have over 3.5million paying subscribers to their
mobile entertainment content services.
An analogous market which we have also used to guide our forecasts for mobile gaming is the interactive TV
market. The UK leads the global interactive TV market both in subscriber numbers/conversion rates as well as the innovation of services offered and the development of a workable business model. iTV games are now
offered as free or pay-per-play (typically per-session) services on all the major platforms and have unsurprisingly proven one of the most popular iTV activities. 1 million Tetris sessions (at £0.25/session) were
recorded during the first 7 weeks of its launch on Sky whilst 2 years later over 100,000 plays (at £0.50/play) were recorded when Tetris was launched on Telewest. In addition hundreds of thousands of high score
submissions (at £0.50 per submission) are recorded weekly whilst a well-promoted quiz game can generate over a million entries (at up to £1/entry) in a matter of weeks.
iTV gaming is done for the same reasons that mobile gaming is being, and will continue to be, done: to fill time
and provide short-term entertainment gratification. iTV games, like mobile games, are hardware-constrained, hold little appeal to hard core gamers but make up for this in intuitiveness, playability and simplicity.
Key to their commercial success, though, has been the seamless integration of the content with the existing TV service billing system allowing painless and easy micro-payment. As has been found in studies of mobile
content use in the Far East as well as profiling of iTV games players, the demographic base is vastly more mass-market than the portable or console/PC games markets with female and older gamer representation nearly
matching that of the population at large.
Conclusion
The European mobile gaming market has been revolutionised by the arrival of universal
operating system standards, downloadable games and colour phones. Having learnt from the success of SMS as a communications trend and the mistakes of WAP as a gaming platform, both handset manufacturers and network
operators realise the potential these developments represent and appear to be reacting accordingly. With a new wave of mobile gaming investment and service development now initiated, the market at last looks set to
follow the successful precedent set in the Far East.
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