Chaos in the Value Chain:
Non-Traditional Paths to Market for Wireless Games
By Eric Low

The market for wireless games is poised to explode. Over the next several years projections from many analysts predict tremendous growth in games and applications as consumers upgrade to phones with larger screen sizes and more storage and computing power. After the billions of dollars invested by carriers to develop next generation networks for a rapidly maturing market of new customers, those analysts had better be right.

With phone number portability coming into effect on November 24, 2003, an ensuing price war and increased customer turnover is expected as consumers, now able to take their number with them, switch carriers in search of the best deal.

With reduced "plan" prices, carriers are shifting their focus to applications that drive revenue and promote network usage. Coupling this with a lack of industry hardware and software standards creates a competitive landscape with a unique value chain. This new wireless value chain opens opportunities for developers to chart new paths to market without the help of publishers.

This article describes the current market, defines the players and their roles in the value chain, and finishes with strategies that game developers can incorporate to attract the attention of channel partners.

Market Opportunity
In short, projections for cell phone applications look good. Ovum Research projects that in 2006 wireless games will be a $4.4 billion dollar industry, while Strategy Analytics projects the wireless game market to be in excess of $1 billion in 2003 and over $7 billion in 2008. Analysts IDC report that there were 7 million wireless gamers in 2002, and they expect that number to increase to 71.2 million wireless gamers in 2007.

Compare those numbers to the overall video game market. According to Informa Global Videogame Market, the market for videogames was $28 billion in 2001 with wireless games representing only $700,000 or .003%. Informa predicts that the videogame market will increase 7% from 2001 to 2006 to a total of $30 billion, but the wireless games market will increase to $3.6 billion and represent 12% of the total market.

There are promising signs that these predictions are coming true. A recent Wall Street Journal article cited Verizon Wireless reporting its 33 million customers downloaded approximately one million games a month in the first quarter of the year and that sales are growing rapidly. According to Julian Corbet of In-fuso, there were 500,000 game enabled phones 18 months ago and 8 million game enabled phones today. In-fuso sees 10% to 20% per month growth and increasing profitability. To put this in perspective, worldwide, that’s more phones than PCs that play games.

At a September 2003 NextGen Communications meeting sponsored by the Technical Business Network in Austin, Chris Davis, Vice President – Services, Metrowerks pointed to statistics that there will be an $11.4 billion market for downloadable products in 2006 in the United States alone. According to Verizon there were 2.3 million BREW, (an application development platform for wireless devices) downloads in May of 2003 alone. This equates to more than 75,000 each day.

Lack of Standards
While the market potential for wireless games seems clear, many developers are frustrated by the lack of standards for both hardware and software platforms. In a perfect world, a developer would know what platform and on what model phone their game will be played. In reality, there are currently over 100 models of game-capable phones on the market and a myriad of development platforms. Choosing the right one determines how many customers you will be able to reach, your revenue split, and, ultimately, your profitability.

Projections for the Java O/S peg 267 million handsets in the market by 2004. Since Java is an open platform, it provides the developer considerably less support. Additionally, there are many varieties of Java to choose from. When porting the game to multiple versions Gerardo Dad, Director of Marketing Services and Researched Managed Developer Programs for Metrowerks, explains that about 80% of code works across all of the varieties. With these difficulties, however, there are rewards. Java returns considerably more revenues to the developer.

Qualcomm’s BREW platform, on the other hand, provides developers with more end to end support and billing functions. But with more support for developers comes a lower percentage of revenues back to the developer. Projections have more than 500 million BREW handsets in the market by 2008.

In the end, there are a couple of factors that will determine how much of the revenue you will see from each game sold. Oliver Miao, CEO of Centerscore told attendees at the Austin Game Conference that between 50% and 70% of revenues goes to the publisher on a $3 per month game, with the developer walking away with 30% to 40%.

Carriers Dominate the Channel
According to the Wall Street Journal, a carrier’s cut can vary between 10% and 70% of the sale price, with European carriers being less generous than their U.S. and Japanese counterparts. As carriers get paid first, developers should not expect to see any revenues for three to four months after the sale. Carriers justify their payment hierarchy position as they take responsibility for the marketing, distribution and billing for every transaction.

They also dominate the distribution channel. Matthew Bellows, President of the Wireless Gaming Review and Mobile Entertainment Analyst, says that carriers will control 70% of cell phone game distribution for at least three years, with retail and web portal distribution models limited to channels for only the hardcore consumer.

New Wireless Value Chain
The customer is the end game for everyone in the wireless value chain and carriers dominate that relationship. After that, there are a couple of different ways to look at it. Bellows likens the wireless value chain to the traditional gaming value chain where developers go through publishers to reach the carrier and consumers. Right now, that is the path to market for most developers.

There is, however, a differing viewpoint. With no handset or platform dominating the market, and with carriers in a desperate search for the applications, there lies opportunity. Chris Davis, Vice President – Services for Metrowerks, describes a wireless value chain that cuts out the publisher when the developer aligns with handset manufacturers and platform developers. His value chain is based on the need for carriers to increase the average amount of revenue they generate from every customer and reduce their customer turnover. Following this theory, content unique to the hardware or platform developer gives them a competitive edge in their respective markets.

Similar to the PC model, advanced software applications drive hardware upgrades. Carriers and handset manufacturers want applications that encourage consumers to buy phones with advanced capabilities. When developing for cell phones, the more a game utilizes the advanced features, the more attention it will attract from handset manufacturers. In the manufacturer’s sales efforts toward carriers, your game is another selling tool. Tier 1 Carriers, those with the greatest number of subscribers, have leverage over handset manufacturers. Compelling applications that work on an OEM’s (original equipment manufacturer) phone returns some of that leverage to the OEM.

For Tier 2 operators, those with less subscribers, handset manufacturers have the leverage. Again, handset manufacturers want to make their Tier 2 customers happy by running compelling content that can boost the amount of revenue a carrier can generate from each customer and lower their customer turnover.

Returning to the platform dilemma, Symbian, a platform supported by Nokia, the market leader in handsets, has gained significantly more traction in Europe than the U.S. That trend may not last for long. Games developed on the Symbian platform that demonstrate the advanced capabilities of Nokia phones make Nokia a friend of the developer and may be an entry point for developers to reach carriers. Understand the new wireless value chain and you will understand the benefits of developing for the Symbian platform.

With no dominant platform in the cell phone space, platform vendors are fighting for the killer applications that give them an advantage. Platforms are only as valuable as the games that run on them. New and innovative titles and applications that are proprietary to a platform give platform developers an edge in the market when they work with handset manufacturers and carriers. Choose and use your platform developer as another path to the carrier.

Getting to the Top of the Deck
Carriers may have in excess of 300 titles to offer consumers. The way to get in front of the customer is to get prominent placement with the carrier. There are two ways to do this: branding and network usage.

Branding is first and foremost in the mind of the publishers. Right now publishers are busy finding brands for which to create games. Once the brand is acquired, the publisher then finds the developer to make the game. The decision ultimately comes down to who can make an adequate game for the lowest price. Reducing your development effort to a commodity and selling it for the lowest price is not an attractive business proposition.

Game developers with a savvy for business development will look for brands on their own. The message to brand managers is that mobile games are an immersive form of entertainment. According to Julian Corbett of In-fuso, the average session time for a mobile gamer is 22 minutes, and 40% play for over an hour. In other words, mobile games are not just for people waiting at bus stops. Corbett further notes that 75% of these gamers are playing at home and during the weekends.

Sell brand managers on the value of the game as an advertising medium and you should be able to use the brand for free or use them as a source of funding. For high profile brands, arrange a revenue split versus upfront money. Cell phone game developer Riot Entertainment Ltd. reportedly spent too much upfront on the licensing rights to develop games for Lord of the Rings and Spiderman and had to close its doors last year.

The second way to get the attention of carriers and to the top of their deck is to promote network usage. This helps carriers in two ways. First, the more customers use a carrier’s network, the more a carrier can charge their customer. Secondly, games that are unique to a carrier’s network helps to reduce customer turnover. Nextel, with a monthly customer turnover rate of 1.4%, spends $450 to acquire each new customer. Keeping current customers, especially with new market conditions allowing number portability, is an attractive business proposition for every carrier.

There are several ways to increase network usage. Games that include updates or a global high score, games that incorporate on-going events, such as sports-based games, and games where the players can download add-ons are all examples. Developers may also consider incorporating "micropayment" elements to their game. For example, for 50 cents a gamer could download a tire upgrade in a racing game.

Conclusion
If the analysts are right, the wireless games market is on the verge of being a particularly hot one. With carriers needing to recoup their investment after upgrading their networks,the search is on for compelling products that allow carriers to raise the amount of revenue they receive from their existing customer base. They do this by selling applications and encouraging network usage. And that’s where games come in. While the traditional path to market of developer to publisher to carrier still exists, the lack of standards for both hardware and software has created the opportunity for game developers to use these companies in their go-to-market strategy, eliminating the publisher and putting more revenue in the hands of the developer.