What’s Up with Wireless?

Doug Lowenstein of the Entertainment Software Associates sees U.S. telecommunications companies using wireless gaming as a selling tool.

The prospect of wireless gaming making interactive games available for play over cell phones or similar devices is exciting to phone companies, handset makers, game developers, publishers, effects animators and content providers. All are looking for opportunities for incremental revenues. The question is whether wireless gaming will take off with consumers and when, and whether all the stakeholders will be able to make a profit from wireless gaming.

More than 450 million mobile phones are sold every year worldwide, and most cell phone users upgrade to a new device every two years or so to take advantage of greater processing power, better screens, improved battery life, and new functions.

Research firm Strategy Analytics values the global wireless gaming market at $1.34 billion (in service and transport charges). Asia accounts for 78% of the total, followed by Western Europe with 15% and North America with 5%. The North American market is expected to grow 84% over the next five years, however, generating $1.33 billion in 2008, versus $63.1 million in 2003.

Last year, 6% of the 1.3 billion wireless phone subscribers worldwide played games on their handsets, according to researcher A.T. Kearney, double the number that did so in 2002. South Korea and Japan are the two leading markets for mobile gaming, with 15% of cell phone subscribers in Korea and 35% in Japan playing games on their phones.

Why the U.S. is Lagging

The U.S. markets small share of the global wireless gaming business is due to a number of factors. U.S. wireless networks have not been as sophisticated as those in Asia and Europe, although the mobile network has improved over the last two to three years and is currently nearly on a par with Europe. Cellular penetration in the key target group for wireless gaming (16- to 24-year-olds) is lower than in Asia and Europe, and handsets are also more advanced, especially in Asia, where cell phones are starting to have sophisticated 3D displays. Asian wireless publishers are offering 3D games, and some Java and BREW-based titles include networked components as bandwidth increases.

Consumer behavior is different in Europe and, especially, in Asia, than in the U.S., a fact that plays into consumer acceptance of wireless gaming. Van Baker, an analyst at Gartner, notes that most consumers in Asia have long commutes (more than an hour a day) and take time off for lunch, which leaves them with long periods when they have no access to games or other data, except through their phones. In the U.S., on the other hand, connectivity is superior both at home and at work than it is over the wireless network, employees tend to eat in front of their computers and commutes are by car, where gaming is not practical. You have less time to amuse yourself on the phone, Baker says.

There is a much greater culture towards playing games [in Asia], especially in the mobile environment, says Nitesh Patel, senior analyst for wireless Internet applications at Strategy Analytics. Patel expects wireless gaming to take off in the U.S. only after cell phone penetration rises to 80% (from the current 50%) within the youth market, and after more young cell phone users have handsets that can handle rich media.

An Industry Push

Despite the slow start, several U.S. companies are bullish on the prospects for wireless gaming. Handset manufacturers and carriers are all emphasizing the availability of games as a differentiating feature to attract customers, says Doug Lowenstein, president of the Entertainment Software Assn. They believe it will be a big driver of sales. Cingular Wireless, Sprint, T-Mobile, Midwest Wireless, U.S. Cellular and AT&T Wireless are among the telecommunications companies involved in wireless gaming.

Cingular offers 300 gaming titles across its 20-25 game-capable phones, with users of individual devices able to download up to 60 of those. The company works with such developers as Jamdat Mobile, THQ Wireless, Digital Bridges, Game Loft (UbiSoft) and Informa. Its really kind of an interesting space right now, offers Mark Nagel, senior product manager at Cingular Wireless. Games are currently offered on a pay-to-own model, but some multiplayer games will probably be marketed on a subscription basis.

Verizon Wireless sells games through its Get It Now service, which offers applications available for download. Charges for applications vary and airtime charges may apply when downloading, browsing, and using certain applications. In the case of AquaX, a game supplied by dwango wireless, Verizon subscribers with select Get It Now-enabled handsets can download a free two-minute demo or pay $3.25 for unlimited-use access.

As wireless service providers interest grows, so does that of handset makers. Several manufacturers offer phones that are gaming-enabled. Siemens and Nokia are among those that are producing game-focused devices. Siemens offers 3D gaming on several models, complete with exclusive titles such as Siemens 3D Rally and Independence Day. Personal digital assistants (PDAs) running on the Palm and PocketPC operating systems also can handle games, and several game makers have produced content for these handheld organizers.

Nokias N-Gage was introduced in 2003, with a software library from companies such as Sega (Virtua Cop and Alien Front), EA (Sims) and Vivendi Universal Games (Crash Bandicoot). Most evidence suggests the device has struggled so far to find an audience both in the U.S. and around the world. It is competing against powerful, marketing-driven companies, notably Nintendo and its GameBoy Advance; it has little distribution in stores and departments where games are sold (Nokias other products are sold in telecommunications outlets); it has a high price point compared to other phones and gaming devices; and it is big and bulky compared to other phones. In addition to gaming and phone functionality, the N-Gage can serve as a digital music player and FM radio and be used to browse the web.

While early models of game/phone hybrids may not succeed, phone companies have deep pockets and some are likely to stay in the market until they develop a device that takes off with consumers. A lot of technology that we dont know about yet will drive this market, adds Lowenstein.

Todd Sherman, president of Smart Box Design, which creates games, including WordPop!, for Palm organizers and is planning to support other platforms, points out that devices such as the N-Gage, Zodiac and Treo600 are all appealing to the next generation of users. These are users who spend a lot of their social time away from their house or apartment. And the more distributors who can find them, the more successful they will be. He also notes that a mechanism has to be in place, as it is in other countries, to make it easy to buy and pay for content. When purchasing gets that easy here, distribution and sales will increase.

Publisher and Developer Interest

Most of the leading game publishers are active in wireless or at least investigating the potential. THQ Wireless, for example, creates licensed and original games for mobile distribution in 70 countries, including WWE Mobile Madness Hardcore, Worms, Billiards, Snood and Hello Kitty, and has relationships with Verizon, Cingular, AT&T, Sprint and T-Mobile, among others. Eidos has also made a commitment to wireless games, and several other major players are testing the market, sometimes by licensing their content to wireless gaming specialists.

Its not a big business for anyone yet, suggests Lowenstein. But publishers look at it as a way to leverage intellectual properties to new platforms. Its an interesting business model for the game industry. He compares the possibilities to the movie industry, where studios generate four or five revenue streams (video, cable, etc.) for a film. In the game industry, historically, that hasnt been the case.

Current technology dictates that the best games for wireless play are simple, such as classic arcade, word, card games, puzzle games and the like; most console or PC games cannot be adapted easily to cell phones yet. There are many creative challenges when it comes to developing wireless games for devices with a 320 x 480 pixel screen size, particularly for those used to creating for devices with large screens and many megabytes worth of memory and hard disk space. You have to be smart in reusing elements and choosing carefully where the program is going to grow in size, says Sherman, noting that there are trade-offs between sound, art, text, code and other elements.

This need for wireless-specific expertise has given smaller, entrepreneurial companies an opening in the market, especially when it comes to original games. Content providers such as Unplugged Games (Void Raider), iFone (Battleship), dwango (AquaX) and other wireless entertainment specialists have been able to assume a significant market share initially.

Jamdat Mobile is one leading publisher, developer and aggregator of wireless content. It has released games ranging from Collapse (with RealNetworks subsidiary Game House) to Gladiator, which reportedly has been played more than 1.5 million times. It also has published wireless adventure, trivia and pinball games, as well as wallpaper and ringtones, based on The Lord of the Rings films. Jamdat works with AT&T Wireless, Verizon Wireless and other service providers.

Sorrent is another market leader. It has specialized in sports titles but has recently branched out into other genres. The company produces original titles such as Shark Hunt, a fishing game, as well as single and multiplayer sports titles under the Fox Sports brand and a wireless version of Ataris Driver, among others.

The Role of Branding

Content providers outside the gaming industry are also testing the market by licensing content to publishers for use in mobile games. Disney has provided content for MMS and Java games in Japan and Europe, through an alliance with Vodaphone, while Fox has worked with Sorrent on games tied to Fox Sports and the Aliens film franchise. Warner Bros. has announced its intention to get into the wireless market as well.

Brands are of paramount importance, says Cingulars Nagel. You could have the best game in the world and people wouldnt find it without the branding. Thats especially true in this market, where you have a hard value proposition for people to understand. Theyre not used to downloading games on their phones yet. About half the games Cingular offers are branded.

Jill Braff, vp marketing for Sorrent, believes it is too early to evaluate the role of branding. Its more about the placement on the deck and how much the carrier supports the game, she says. There are as many as six pages worth of downloadable games listed on the handset screen (the deck), and those with placement on the first couple of pages do much better than those buried farther down.

Cross-promotion is also critical. To help its titles stand out, Sorrent has marketed some games through alliances with carriers. For example, its Fox Sports basketball and football titles were supported by a sweepstakes with Sprint, which got the games noticed in 15,000 Sprint retail outlets and increased sales 50% during the promotional period.

Braff notes that the business has evolved. A year ago, the market was crowded with small publishers, and carriers offered so many titles it was hard to discern quality from quantity. Now, she says, carriers are reducing the number of games and working with fewer publishers. Theyre evaluating the quality of each game and offering only the best.

Market Challenges

While the industry has high hopes for wireless gaming as a means of generating incremental revenue, there are challenges, not only in the U.S. but elsewhere as well. In Europe, mobile gaming is very much a niche activity in terms of downloads, says Daren Sidall, an analyst in the U.K. office of Gartner. There is a question about consumers willingness to pay for games. While15% of mobile phone users in Europe play games on their devices, only 1%-2% of users have downloaded and paid for a game, Sidall says. The remainder play games that come preloaded with their phones and are free of charge. In our view, consumer interest does not match the amount of hype.

Sidall reports that cell-phone gaming is essentially a time-killing activity while sitting in an airport or on a train, and consumers typically play for no more than 10 minutes at a time. Even when shown Java-based titles such as graphics-heavy racing titles, consumers in focus groups didnt show any interest in purchasing such games, preferring PCs and consoles as their gaming devices. The mobile phone will never become a compelling gaming platform, Sidall predicts.

Baker believes that teenagers, who spend a lot of their free time away from home, are one market segment with potential in the U.S. Teens have shown interest in downloading content such as ringtones and are starting to experiment with games. Thats a pocket that makes sense, says Baker, who adds that 18- to 24-year-olds, who grew up with gaming, also show potential. But [gaming] is just a distraction, just a way to pass the time. How much money are you going to get from them? He believes most consumers will draw the line at two to three game downloads per month, at $2 to $3 per game. In addition, within the overall U.S. cell phone market, teens and young adults comprise a relatively small segment.

Nagel disagrees with the proposition that consumers are not willing to pay for games. Noting that people will pay for content such as ringtones, he adds, Games are interesting because people pay more for them. Gamers understand the concept of paying for games and are willing to do so on a phone as they would in a retail store, he says.

One area where Sidall sees an opportunity is in sponsored content, where a large consumer goods company creates a wireless game to promote its brand. The game fulfills the function of giving consumers something to do in their free time without paying for it, while phone companies and game publishers are compensated by the corporate sponsor. So far, mobile marketing promotions have been fairly basic, such as offering free ringtones, but large consumer goods companies could invest in a game as a means of strengthening younger consumers relationship with their brands.

An even more significant challenge than willingness to pay is the fact that consumers look for different designs in gaming devices than phones, Sidall stresses. They want their phones to be sleek, streamlined and pocket-sized. But to get the most from a game, they need a relatively large screen and keypad, which will dictate larger, bulkier phones, no matter how much technologies improve. One path in the future may be for telecom companies to offer a single service that can be used with multiple devices, so consumers could own a phone and a gaming machine and use both under the same service contract. Yet its debatable whether consumers will want to pay for multiple devices.

Baker sees a growth opportunity for wireless applications that allow hardcore gamers to tie in with their online console and PC gaming communities. While there may be a minimal amount of wireless play involved, the focus would be on allowing passionate gamers to use their phones to get updates of stats and standings for multiplayer communities of which theyre a part. That connection is crucial, Baker says. If theyre heavily invested theyll want to stay in touch with a changing situation.

Making Money

The various players in the industry have different, sometimes opposing, objectives for the gaming market, which means compensation standards and other factors are still evolving. Schelley Olhava, an analyst for IDC, says that for the first few years, the gaming and telecom companies were spending a lot of time finding ways to communicate with each other. The telecommunications industry was suits and Powerpoint presentations and the gaming industry was jeans and off-the-cuff conversation, she says.

The two businesses are now on the same page, but a lot of business-model issues remain, including creating a pricing model that allows publishers to earn a return on their investment. The unknown factor is whether the current payment structures if consumers decide they want to pay for wireless games and revenue-sharing models will lead to profitability for all the players.

So far, the revenue-sharing models that have emerged depend on the type of game, according to Patel. For thick-client games (Java/BREW/Morphun-based games that are downloaded onto the handset), operators can charge a mark-up for premium content. Typically, the operator receives 100% of the download revenue and about 30% of the premium content value, with the remainder shared with the developer, publisher and aggregator. For browser-based games (played while connected to the mobile Internet), operators charge regular transport rates for data and there is usually no premium charge for play (except in some countries, such as Japan). The operator typically pays the game supplier a one-time upfront fee, but there could be revenue-sharing, depending on traffic. For messaging-based games (played on messaging platforms such as SMS and MMS), customers are charged on a per message basis, with the operator taking most of the revenues.

The Rise of the Smart Phone

Currently, SMS-based (text) and MMS-based (text plus animation) game downloads account for the greatest share of the market, according to Juniper Research. But rich media games, which require more advanced Java or BREW-enabled smart phones, are expected to account for nearly 65% of the global market by 2008.

Baker doubts whether improved, multifunction phones will drive the market, however. He believes that high-bandwidth phones will probably not be used for downloading content, as often predicted, but for handling more calls, despite the industrys desire to earn revenues from data and entertainment. Nobody wants to be in the business of the fastest, cheapest pipe, he says. Theyre interested in anything with the potential to give them an incremental revenue stream.

One technological area that needs to be addressed is that fact that, even with games on a standardized platform, such as Java, titles have to be tweaked somewhat for each device, which adds to publishers and developers time and expense when creating wireless games. The industry is working on creating standards so the same games will work on different phone models. Sorrent has developed its own platform that allows porting to different handsets, with more than 100 models supported. Thats no trivial achievement, says Braff. She notes that true realtime multiplayer gaming will need to have cross-handset and cross-carrier functionality, such as that featured in Sorrents Fox Sports Boxing.

While the industry is waiting for phones with improved batteries, processing power, color, screens and other facets to attract hardcore gamers to the wireless space, it may be overlooking a viable current market. [Telecom companies] could tap into an audience that doesnt necessarily play [console or online] games, Olhava says, noting that a certain percentage of the audience is happy with board and card games and is not looking for a console experience. Theres a really credible market among the casual game player.

Nagel sees two distinct markets, the male gamer aged 19-30, who is looking for a more console-like experience, and the non-gamer, including women (one of the fastest-growing markets for wireless gaming), who want puzzle or card games and are not ready to upgrade to a GameBoy-like phone.

Similarly, Sorrent recently conducted a study, the results of which will be released shortly, that indicated there are multiple market segments. Its very clear that theres not one type of wireless consumer, Braff says. Sorrent has identified four growth areas: sports, casual/classic games, games that appeal to the hardcore gamer, and youth-culture content. The last category describes a range of content, from wallpaper and ringtones to messaging and gaming, that appeals to college-aged and younger consumers.

Braff believes Sorrents research will debunk some widely held perceptions about the mobile gaming consumer. People are into mobile gaming, she says. Theyre actively pursuing getting stuff on their phone, more so than people understand.

Karen Raugust is a Minneapolis-based freelance business writer specializing in animation, publishing, licensing and art. She is the author of The Licensing Business Handbook (EPM Communications).