Why Do Venture Capitalists Love Mobile Gaming?

Thanks to the San Jose Biz Journal for its article discussing the boom in funding for mobile phone game creators and publishers. The story notes that venture capitalists "made six gaming investments totaling $50 million in all of 2003. In the second quarter of 2004 alone, there were five [largely mobile gaming] deals totaling $86 million." Apparently: "Java-enabled handset sales tripled in 2003 to 95.5 million units and sales of Qualcomm's Brew platform reached 11.6 million in 2003, up from 3.5 million the prior year." Although "mobile gaming is young enough that it's cheap to produce a lot of games and see which ones stick", do you think these large investments are going to pay off?

Elevator effect

Could you describe such a "business opportunity" to people if you only had ten seconds with them in an elevator? Probably, especially if the VC in question was playing a mobile phone game at the time.

Simple.

They want to fund games that will run only on the newest phones with extra ram and ultra-colour display and why not a microdrive. Then, while you were out buying that phone, they'll come up with an even better game that needs the resources of an even more expensive phone which, while unfortunately incompatible with your current one, can be yours for a low initial fee and a three year contract.

Don't play

Personally I don't play mobile phone games very much. There are a few problems I have:

1) when I would want to play one would be where there would be other people around (like on the bus), and there is rarely an option to turn off sound;
2) the screen is very small, and if the sunlight catches it wrong you can't see it very well;
3) the keys on a mobile phone are normally just not good enough for playing a complex game, or ever some simple ones.

I don't know how most other people feel about this, but personally I don't think I would back mobile phone game creators based on my own gaming experiences and preferences.

Then again, I'm not everyone else...

T.

Many of these VC's are unlikely to get a return.

(Posted as AC cos I'm in the business)

They see market penetration of handsets, and also see a fairly open market. (Open as in "not locked down by any one supplier") They immedially see $-signs and jump in like a mad thing.

Problem is, in order to get the attention (for the most part) these VC's want licensed games in exchange for their money - see easier sales and greater returns that way. Which is fine, but getting a license (usually) costs money from the original purchaser. How much would it cost to buy... Sonic, to pick an example? Up go the operating costs.
Then these games have to hit a wide variety of different handsets in a short timescale to a very high quality (often with restrictions mandated by the license owner). That requires alot of staff.
Between the two of those, it means the burn rate is _huge_. Many of these companies appear to be securing VC simply in order to keep operating.

Then you have the final coup de grace - the market (apparently) requires price differentiation between standard titles and branded "premium" titles - talking 10 to 15 Euros for a single title, and guys, that's just not sustainable as a business model. Piracy's through the roof as there's very little DRM on the titles, and they're astoundingly easy to re-distribute (given footprints circa 100k). You get coverage but not sales.

This is why (in my biased opinion) branded games are going to be a swift route to Chapter 11 for some producers and the VCs that fund them - the impulse-buy market needs lower prices and that's not feasable given the costs inherent in producing a branded game.

For what it's worth, I understand that some of our stuff sells for just over the price of a ringtone, and sells well. Impulse-buy works, people.

Boredom

Speaking as someone who sells cellular phones and service, I'd have to say that the reason it's such a good market is because people get bored easily. If I can make a version of tetris or pong for a cell phone, people won't buy the phone to play it... but if I charge $1.99 to download it, enough people will have a phone in their pocket and be bored that I will make money. People don't buy phones to play games, they buy them and THEN play the games when they're bored.

There's a one word explanation for the VC interest

China.

They love it

...because the upside on something like this is almost unlimited.

What would you give for the opportunity to get some ground-floor money in on the Sony Walkman, or Nintendo Gameboy, or even any number of those cheesey game/watch things Radio Shack was selling by the truckload a few years ago? Mobile devices are one of those items that, if it hits, EVERYBODY gets one.

probably

Well, the natural, obvious answer is that some will pay off, some won't. Venture capitalists don't make bets thinking that every one will pay off, you have to understand. A majority of these will pay off, and the overall market will expand and probably make the average payoff high enough to meet that hurdle that VCs expect on their multi-year investments. For some VCs that's a relatively small failure rate and 3-4x on their average deal. For late-stage VCs, it's an extremely low failure rate and 1.2x on their average deal. But think of it this way--if the aggregate investment in mobile game companies (not counting cash they themselves generate, but including cash non-mobile game companies pour into mobile development) adds up to a few hundred million after a few years and the market expands to $5 billion, then the payoff will probably meet VC hurdle rates (depending on the revenue multiple for sales, i.e. whether the sale of these companies leads to 1x revenue or 3x revenue). Need I remind you that the ringtone market alone was estimated at $3 billion last year?

Mobile gaming to me equals =

Mobile gaming to me equals = GBA

Using a device that is suited for gaming with games that are actually fun to play and not just low res rehash games chopped down far enough to allow the Java engine o' the day to play it on a screen the size of my watch.

This is simply one more way for a cell phone company to sell you one more "service" or "improved phone".

I'm not buying.

It's 1985 all over again

When it came to the old consoles, games were relatively easy to produce; not because they were easy to code (it was basically all assembly language back then), but because they were so small.

Eventually, games were almost *too* easy to produce, as the market was flooded with such garbage that it nearly destroyed the videogame industry.

Now with the advent of these fairly simplistic (in terms of capability) mobile gaming devices, once again we have the danger of history repeating itself. Not that I think the whole industry will collapse; certainly not. But with all this venture capital flying around, it's beginning to look like the .com thing in 2000 all over again; too many people investing in too many products with little or no real value.

A few reasons

In addition to the insane market penetration (just about everyone has a cell phone nowadays) mobile games are a lot easier and cheaper to produce than new console or computer games. Bump-mapping, anti-aliasing, trilinear mipmapping? Hell no, it's only a phone! They can just remake an old Nintendo game with updated graphics and sell it. Just look at the high costs of producing state of the art games vs. the number of copies sold, and then take a look at the cost to produce a Columns clone vs. the number of people who will be playing it on the subway.

Greed.

They see a cheap investment with a huge potential payoff.

Mobile games are stupidly easy to make with modern tools since the target platform is about as complicated as a home console was back in 1985. The problems in making games suitible for such a target have been well documented and mostly solved. And while you cannot make an Xbox team with one or two people working out of a garage, you can do just that with a mobile game.

END COMMUNICATION

no

do you think these large investments are going to pay off?

No it wont. The phone is just not suited for games. Most of the games I've tried are clearly not worth the $5-6 they would cost if I had bought them. The graphics are by far worse than the original now 10+ years old Game Boy and the game concepts are very basic. The only thing that phone games have going for them is that they are most often very simple designs that can be programmed by a single non-professional programmer. It could be a starting point for the future game developer.. or something. But even that is unsure...

Going to pay off?

Jamdat is already profitable and growing all the time. That's more than can be said of alot of companies; for example, VA Software.

Instead of stories questioning already viable profitable companies, maybe slashdot should look within and question itself. Not EVERY technology company is drowning, only ones with rediculous stock tickers like LNUX.