Competition gets ugly in hot mobile games market
PARIS (Reuters) - The online gaming industry is hotter than it has ever been thanks largely to Facebook and Apple's (AAPL.O) iPhone, which are bringing video games to vast new audiences who have never been gamers before.
But lower barriers to entry for game developers mean competition is intense, and would-be market entrants should beware of being carried away by the success of a handful of games like Angry Birds, industry executives said this week.
"It's an ugly scene," Alexandre de Rochefort, chief financial officer of mobile video game specialist Gameloft (GLFT.PA), told the Reuters Global Technology Summit in Paris.
"The smartphone market is not a goldmine for developers. It's a bit like playing the lottery."
Developing and distributing games is easy now thanks to companies like Amazon (AMZN.O), who rent out computing capacity that can be used to test games, and platforms like Facebook and Apple's App Store, that can reach huge audiences at one stroke.
UK-based media research firm Screen Digest says the market excluding advertising revenue grew to $3.7 billion in 2010 from $2.2 billion in 2007 -- the year before the Apple App Store opened -- and will grow to $7.8 billion by 2014.
The App Store offers 350,000 applications, mostly games.
"Since Apple launched its App Store, the mobile gaming market has undergone a transformation," says Screen Digest analyst Jack Kent.
"Before, less than 5 percent were paying to access mobile games, in Europe at least ... since then consumers are a lot more willing to pay for content and particularly games."
The changes in the industry have also sparked a flurry of dealmaking, as big gaming companies like Electronic Arts ERTS.O and privately held Zynga, maker of Facebook games including FarmVille, have gone on the acquisition trail.
Screen Digest tracked 26 mobile gaming-related acquisitions last year, up from 12 in 2009, and 11 in the first quarter of this year. Venture capital funding has also risen, with 21 deals worth a total of $200 million last quarter, compared with just three worth a total of $27 million a year earlier.
Index Ventures, an early investor in Facebook game maker Playfish which was sold to Electronic Arts for $400 million in 2009, says the industry has become far less risky for investors.
"We used to stay away from games," Neil Rimer, Index co-founder and partner, told the summit. "It was really like the movie industry where you had to come up with this basic idea for a game and then spend 5 to 15 million euros ($7 to $21 million) and two years building the thing," he said.
"Sometimes it would work. Many times it would bomb and you were out 15 million bucks."
For developers, though, it is still a hit or miss business. Even Rovio Mobile, maker of the most successful ever iPhone game, created 51 games before Angry Birds.
Rovio is moving to capitalize on the game's popularity by turning Angry Birds into a media franchise, with toys and T-shirts already on sale, ambitions for a feature film and possibly even theme parks.
Mind Candy, the UK company behind the Moshi Monsters website -- a kind of children's Facebook crossed with Tamagochi -- is also talking to Hollywood about making a film. It already has Britain's best-selling children's magazine and a range of toys.
"The vision here is to build the largest kids' entertainment property in the world ... the Harry Potter or the Star Wars or the Pokemon for a new generation," founder and CEO Michael Acton Smith told the summit.
Tolls charged by gatekeepers such as Facebook and Apple are also significant -- typically 30 percent -- and mobile operators charge more.
Even established players like Finland's Habbo Hotel, a teen hangout website that has been going since 2000, is struggling as telecoms operators charge up to 70 percent of the micropayments that users make for virtual goods through premium SMS texts.
"Even the 30 percent that Apple and Facebook are charging is still outrageous," Timo Soininen, chief executive of Habbo owner Sulake, told the summit.
Gameloft, which focuses on simple, so-called feature phones -- those with cameras or music players but without advanced Internet connections -- reckons it is relatively safe precisely because most of its business is not on Facebook or the iPhone.
Despite dwindling feature phone sales, the sheer number of different phone models for which game adaptations are needed puts off new entrants, meaning Gameloft shares the bulk of the hard-core mobile gaming market with just one competitor, EA.
"Zynga has made it very clear that their typical client is a female, 40 years old, staying at home in the mid-West," Gameloft's Rochefort said. "Gameloft has not sold a single game to this kind of client in the last 11 years."
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