Traction in mobile gaming brings sea change to space : Reality: Not everyone will play games on handset

After years of treading water and failing to live up to outlandish hype, mobile games finally may be starting to make progress. And it’s the Apple’s iPhone – and, to a lesser extent, other multimedia-friendly smartphones – that’s moving the needle.
Which is why carriers are beginning to rethink their strategies.
Once regarded as the killer mobile app that’s just around the corner, mobile games have been a perennial disappointment among wireless data applications. (How’s that for a dubious achievement?) Only Electronic Arts Inc. and, to a lesser extent, Gameloft, appear to have made any real money in the space, while solid second-tier publishers such as Glu Mobile Inc. have struggled to earn profits thanks largely to onerous porting costs, burdensome carrier revenue-splits and nightmarish carrier decks that have led to the industry’s failure to surpass the “golden nickel” – the 5% or so of mobile users who download a game.
The iWhite iKnight iPhone
The iPhone addresses all those issues, and it does so with a sexy device supported by a familiar, easy-to-use storefront in Apple’s App Store. Not only does the storefront offer widespread, easily accessible distribution, Apple keeps only 30% of revenues and allows developers to pocket the rest, presenting a far more attractive model than carriers traditionally offer. And unlike on-deck games – which carriers demand be ported to a wide variety of devices – game makers targeting the iPhone and iPod Touch need build only one version of their title.
Those factors, combined with iPhone features like its big screen and accelerometer, are giving the long-stagnant space legs, according to recent figures from comScore/M:metrics. The market research firm found the number of mobile game downloaders grew 17% from November 2007 to November 2008, and iPhone owners accounted for 14% of all game downloaders in the recent month despite the fact that the device holds only a 1.1% market share worldwide. Mobile gaming on smartphones increased nearly threefold year-over-year, comScore said, while non-smartphone gaming actually dipped 14% during the period. None of the top 10 handsets used to download a game in November 2007 was a smartphone, comScore said, but six of the high-end phones ranked among the top 10 in the most recent month.
The iPhone has changed the game so much, and so quickly, that Glu Mobile CEO Greg Ballard has conceded his company “was probably left behind a little bit” when it failed to build games to the platform aggressively.
Handango Inc., a longtime distributor of smartphone applications, echoed comScore’s findings last week, noting that games accounted for 19% “of top category sales” last year, up from 11% the year before. BlackBerry “was the big winner in 2008,” according to Handango, with Research In Motion Ltd.’s devices accounting for five of the top 10 phones downloading content from the storefront.
Smartphones can be fun
“What I think has happened with these smartphones is that they’ve proven that you can actually have a good experience from a consumer perspective on a platform that has these kinds of capabilities,” said Eric Puterbaugh, an analyst with Nielsen Mobile. “What it shows to me is that there’s more fragmentation, which has always been the problem in mobile gaming: How do you reach a lot of people? I think the App Store and the iPhone have shown that there are alternatives to the traditional distribution model, although some are succeeding more than others. It’s not a free ticket.”
That fragmentation will increase as Google’s Android evolves from a bazaar of free mobile goodies to a legitimate market for transactions and as a host of other mobile storefronts come online. Microsoft Corp., Nokia Corp.’s Symbian and RIM are all in various stages of rolling out their own distribution channels, Nokia is already targeting users with its Ovi brand, and Palm’s branded storefront will support its upcoming Pre.
While revenue-share models vary from platform to platform, each allows developers to build to a targeted handset or group of handsets instead of having to custom-fit a game for a broad swath of devices. So smaller developers not only have unprecedented distribution opportunities, they have a low-cost path to what can be a very lucrative market. Carriers are beginning to counter the new distribution channels, by finally showing some flexibility in their revenue-share models.
Changing role of carrier
“Changing the economics of the carrier business will be essential to maintain publisher support,” Ballard said last week in an earnings call. “We are increasingly insisting on better margins before committing to support new initiatives, and even older platforms going forward.”
And the entire mobile gaming space is likely to grow thanks to the new platforms, Puterbaugh predicted, as more customers become aware of what their phones can do beyond making calls and sending texts. But even if the segment is in the midst of a sea change, the transition is a tempest in a teapot when it comes to the overall mobile data market. Stories of garage developers striking it rich with an iPhone game abound, but it’s unclear just how lucrative the space can be for established publishers who actually have to pay overhead. Carriers may value game sales as part of an overall data service, but paid-game revenues are unlikely to approach the sky-high predictions of a few years ago until high-tech, game-friendly phones gain substantially more market share.
“We learned early on that it’s hard to deliver a good experience on those feature phones,” Puterbaugh observed. “Certainly the idea that everybody with a mobile phone would potentially be a person who played mobile games was a misleading concept from the beginning.”