SharkJumping

Video In-Game Advertising Bubble?

Similar to the podcast advertising rage, one wonders if the video game business can realistically support the amount of venture capital pouring into "in-game" advertising companies.   One of the press releases indicated that in-game advertising is poised to grow to more than $1B before 2010 while another said it will be $2B+ by 2008, although I can't find the exact research except from DFC Intelligence saying it will be $500M+ by 2009.   

There is no question that consumers, especially the always desirable young male demographic, spend ever increasing amounts of time in front of video games, some of which will be web-connected ad environments (the majority of PC's today, and I would think maybe 25% of consoles in 3 years).  Although there is an amazing tolerance for advertising where it's not too intrusive, it's hard to see how much of it will make sense in any video game where there is a specific story and environment involved, e.g. in a wild west game or in Halo, how many advertisers could plausibly insert ads, meaning how many Pepsi machines do we really think were around in the 1840's, or in the science fiction future?   And who is going to stop to click on the ad, meaning it's more product placement than advertising, which makes it a much smaller market.

On the other hand, it should work quite well in modern games such as Grand Theft Auto and most sports games, where EA has traditionally had product placement and advertising opportunities.  And it's true that most game publishers are desperate to find additional revenue sources as development costs explode upwards, especially if the hoped-for $60 price point doesn't hold for next generation console titles.

So assuming that the market will actually develop, let's tally the players in this small but potentially lucrative market:
1.  Massive - the grand daddy of game ad networks, I'm told it's raising money at a $200M+ market valuation.  Has raised at least $17M in the first 3 rounds, and has a series of video game partnerships.  It's apparently up and running although I've never seen an actual advertisement in a game.
2.  IGA Worldwide - announced a $12M A round of financing today.  Has a proprietary in-game advertising technology called Radial.  Has not announced any partnerships.  Cleverly owns the URL InGameAdvertising.com
3.  Double Fusion - hired Geoff Graber, formerly of Yahoo Games, and announced a $10M A round 11/05 led by Accel, and moved the company to SF from Israel.  Has announced no partnerships.
4.  There is at least one more currently recently funded in-game ad shop which has not announced its funding yet.

Plus there are players like Shockwave.com who have announced plans to do in-game advertising themselves across their large casual game network, and probably more that I don't know about.

So we have at least 4 well-funded independent in-game advertising providers, plus some who will do it themselves.  The key question is what should an ad serving and selling network be worth?  It should be some small percentage of the overall advertising market since the vast majority of the value goes to the site or game which is delivering the user.  If the in-game ad market is theoretically worth $1B by 2010 (in 4 years), than it's reasonable to assume that the folks who deliver the ads are worth maybe 20% of that number, assuming a competitive marketplace.  Therefore, you have the total market value at $200M at most, which doesn't jibe well with the series of announcements so far. 

I would assume one will see Massive continue to lead in the console space, while the others focus efforts on sectors such as casual (probably the best place for advertising due to slower game pace, fewer story line issues, and lots of game breaks), mobile, and handheld, but there is already a crowded marketplace on the supplier side.

Full Auto Demo: Why XBox Live Marketplace is Valuable

We were setting up the XBox 360 at the new office this weekend (will post later on the significant pain involved in linking it to Media Center) and I remembered that the new Full Auto demo had been posted to XBox Live Marketplace.  Within 15 minutes we had downloaded the 650MB file to the XBox and there was immediately a lot of yelling going on since the game is a huge amount of fun to play!  Based on the demo, it's definitely on our purchase list for Feb 15 when the full game ships - see Sega description

So why is this important - PC users have been downloading PC demos for a long time, and even Xbox or PS2 users could get demos off of disks distributed through magazines and other outlets.  The Full Auto experience was important because it was SO EASY.   The XBox Marketplace makes it comparatively simple to download movie trailers, game demos, and eventually, a host of game add-ons, new levels, etc. (although it doesn't allow you to do anything else while downloading files - see earlier post)  This functionality has been discussed for years, but has been too hard to implement in consoles without broadband functionality, hard drives and a robust online interface - today's simple great game demo download pointed the way for me on Xbox since the initial content I reviewed in late November wasn't very compelling, outside of a couple of fun Live Arcade games.

The general consensus is that Sony is not as committed to online functionality as Microsoft is, and may not even have a built-in hard drive in order to reduce costs stemming from the choice to include a Blu Ray drive and more powerful processor.  I'm not sure Sony needs to have as robust a system as Xbox Live, but to ship PS3 without a reasonable online game matching system, basic community functionality and the ability to download extra game content would be a serious error.  This current generation of console users is accustomed to the benefits of online communication and file transfers - simply having a faster processor and cool DVD won't be enough over the course of a console cycle.  And as we've seen with Kart Racer in Korea and host of other RMT (as detailed here in Wikipedia) games in Asia, the potential revenue from selling add-on items is going to be quite large, at least in Asia and probably around the world.

No Surprise - Gizmondo Europe files for Bankruptcy

As projected in previous posts here, Gizmondo Europe filed for bankruptcy on Friday to try to restructure its finances - its Swedish subsidiary is expected to follow, but the US one will supposedly not declare ch 11 as well.  The company (TGTL.PK) has recently attempted to reduce costs by laying off staff, it tried to restructure its debt (held by former executives) by putting up the company's advertising assets as collateral, and it announced additional financing ($5M line of credit convertible at $.50/share).  There is talk of some private equity fund in Switzerland willing to invest $50M, but it's hard to see that as a credible option given the situation here.

Just unfortunate it was always so hard to sell the stock short, but it's still amazing that the stock was at $32 a year ago with such an obvious set of problems.

Blu-ray Pricing = $1,000 PS3 Cost?

The news coming out of CES regarding possible pricing for next generation DVD players continues to grow, but I'm more curious about what it means for Sony and the cost of the PS3.  Toshiba announced HD-DVD models for a March launch at $499 and $799 - that's high, but maybe not outrageous for a next gen platform with very cool capabilities, if not a lot of content.  Pioneer announced the first Blu-ray DVD model for the astonishing price of $1,800, presumably with a launch date around the Summer, which is when Sony announced they would ship their first models, as will an announced $1,000 player from Panasonic.

What's interesting is that analysts seem to feel that Toshiba will actually lose money on the $499 model, but is selling it below cost to jump start the HD DVD marketplace to keep Blu-ray from running away with it when PS3 ships.  The first question is "what costs so much in a next gen player?" I assume the casing, power supply, external connections, and basic memory/chip are not radically different than today's $100 DVD players - it's the laser and related new technology parts which cost so much more, as well as the need to ramp up overall production and pay off the cost of new equipment, but that's a huge jump in cost, some of which is due to royalties, mostly paid to Sony.

So let's assume the raw cost of the new core technology components of a Blu-ray DVD machine is $400-500 if Pioneer and Panasonic are selling the initial SKUs above $1000, and if Toshiba is supposedly losing money on a cheaper HD DVD player priced at $500.  iSuppli did a thorough teardown of an XBox 360 in November, estimating that the motherboard components (core processor, graphics processor, memory, etc.) cost around $370, with an overall cost of $525 - but that was with a simple DVD-ROM costing an estimated $25.  So for PS3 add in the guts of a next gen Blu-ray drive costing $400-500, as well as a presumably more expensive Cell processor and graphics CPU, and Sony is looking at a Bill of Materials above $1,000 for the PS3 - that is compared to an estimated $499 retail price point.

It's normal to lose money on consoles for the first few years since manufacturing efficiencies bring the cost down once tens of millions of units ship (and software royalties kick-in), but I don't know that there has ever been a loss of this magnitude on a per unit basis.  This starts to make that Blu-Ray bet look more expensive than I first thought, although I'm sure Sony regards this as one of the key wars they need to win since the royalties from a winning bet would more than pay for the PS3 subsidies.  If you're Microsoft and Intel, they're probably going to go out of their way to subsidize HD-DVD in order to increase the pain threshold for Sony, so it's going to be a bloody battle for everyone.  Unfortunately, consumers will inevitably lose out while the battle is waged, just as we did with the DVD Audio/SACD fiasco, which destroyed that promising market and left the music labels with today's non-secure music CDs since consumers became so confused that the machines never caught on.

SharkJumping: Year in Review

I started blogging in late July of 2005, primarily to understand the blogging phenomenon, especially after my wife consulted for blogging pioneer SixApart, and after I attended the Casual Games Conference in Seattle.  In that time, I have attempted to focus primarly on digital media, gaming, consumer technology, and a few other topics in hopefully related areas.  So let's do a very brief year-end summary:

• Infinium Labs - home of the aptly named Phantom console - blogged about them here and here.  In the last 6 months, the stock has dropped essentially to $.02, they've replaced the CEO, and it's clear it's going to Zero...
• Gizmondo - blogged about them here and here - my personal favorite, whose PR hack repeatedly emailed me asking "if I was part of the conspiracy against them".  Stock has dropped to 2.5 from 10 since my October post .  It's going to Zero...
• Loudeye - a good group of employees in a bad business.   Stock has dropped to $.41 from $.80 since I blogged about them in August - will be sold for less than that at the end of the day - a victim of bad sector economics and a horrible Overpeer acquisition which they shut down last month.
• Digital Music Market and Competitors - Apple continues to utterly dominate the category, with Real, Napster and others bringing up the rear.  Good news is that 75% market share brings incredible economies of scale to Apple in the player hardware business - Bad news is that the music labels still own the download category, and utterly control the economics.  RealNetworks and Napster will fight it out in the subscription business until Apple enters it in 2006, and all competitors will focus on the new web/ad-supported sector.
• Ringtones/Dwango, etc. - An amazing global $5B+ business which outlasts the perpetual naysayers, and which delivers returns increasingly to music labels and to carriers vs the earlier outsized returns to aggregators such as Infospace, Moderati and Zingy, all of whose business models are starting to resemble the market dynamics of Sysco (that's the largest US food distributor, not the router company)
• Casual Games - an unsung, but quickly growing entertainment category which is about to be hit by standard consolidation economics, with many current players being bought or going away, with the others being relegated to "lifestyle" businesses.  However, I believe the growth opportunities of this sector make it the most promising one of the entertainment category.  The reason I invested into Puzzle Pirates is because I believe they are a key break-out player in the category.
• Next Gen Consoles - XBox 360 looks like a good box with a potentially phenomenal online business, but not a great software business since the initial games are weak.  PS3 won't ship until Q4 2006, but will have great games and mediocre online support.  Who knows what Nintendo Revolution will do, but their amazing success in Japan with non-standard games for the DS is a potential indicator.
• Consumer Bubble 2.0 - yes, it's arriving, meaning valutions are increasing for these companies, but it doesn't mean they're all over-valued, just that there is too much investment cash in the category - these new entertainment firms will redefine what is currently a traditional linear media company.  E.g. if you're a newspaper company, what are you doing now as your current business inevitably declines?
• Donnerwood Media - we will launch a kick-ass new entertainment category in Q1 2006

Thanks for reading Sharkjumping this year - 2006 is looking like a very fun year....

Sean

Family Entertainment Protection Act - Family Values Insanity Continues

In a mad rush to match the Christian right wing's Family Values approach, Democratic Senators (all mysteriously Presidential hopefuls) Clinton, Lieberman and Bayh today introduced the Family Entertainment Protection Act, attempting to make the Federal government responsible for regulating the sale of violent or sexually explicit video games to minors.  I realize that yesterday I blogged about the parental issues regarding video games - however not once did I suggest that this is a Federal issue since it's NOT - it's a parental issue, and maybe, a state or local issue.  I completely agree that AO & M games should not be sold to minors, but I fail to see why this is any different than other products which are regulated primarily below the Federal level.

I looked for the entire text of the bill, but could just find the summary on Senator Clinton's site.  Even in 5 minutes of thought, it looks like it will ignore the following issues:

• these legislative attempts are routinely overturned by various court systems as unconstitutational.
• there is no Federal law surrounding movie ratings (it's voluntary), which one might logically think is a similar issue, but which apparently doesn't require the focus of these 3 senators
• liquor and cigarette sales to minors are regulated primarily by states, but I guess the societal impact of video games is a much larger issue, so the Feds should regulate it
• that the Federal government might actually have better things to do with its time, such as spying on its own citizens

I realize the jockeying for 2008 is beginning - I just foolishly hoped that we would focus on more substantial issues such as the War in Iraq, Off-shoring, our Education System, etc.  I suppose the only good news is that this focus shows the increasing impact of video games on the country - it's now truly become the 4th leg of Entertainment, along with Music, TV and Movies, and it now requires that video game producers become as big a political donors as the RIAA and MPAA if they wish to receive equal rights.

Children and Video Games: A Wonderful Letter

My wife was saying the other night that some of our friends are surprised that we, especially I, rarely allow our sons (age 6, 4, and 2) to play video games, and on those rare occasions, we limit the time to less than 30 minutes and we limit the possible games to a few (educational ones and Backyard Sports ones) that we have chosen.  Given that the majority of my oldest son's friends have some type of portable game console, or easy access to a gaming PC/console, I occasionally wonder if we're being too conservative about it.

Now there is no perfect way to raise children, and we certainly won't win any parenting awards, but as an avid gamer (currently alternating between Call of Duty 2 on XBox 360 and Animal Crossing on DS), I have been struggling a bit to explain why I don't think it's a great idea for children to play video games without coming across as a Jack Thompson-like lunatic, especially given that I work and personally invest in the sector.  Then today I read a letter to the Editor of the gaming blog Kotaku which explained it more eloquently than I could ever say - the direct link is here, as is a long list of comments, and it's worth reading if you have children interested in video games, as they all seem to be. 

At the end of the day, my personal feeling is that video games are an amazing form of entertainment, but that they have about the same value as television, and should be treated in a similar vein, not held up as some type of wonderfully creative activity whose value far exceeds activities such as reading or personal social interaction.

Nokia N-Gage is Officially Dead

To no ones surprise, Nokia announced the death of the N-Gage mobile game platform this week.  In spite of repeated denials about its impending demise over the past couple of years, Nokia decided to focus on music and camera-focused phones, while attempting to integrate better game technology into their advanced Series 60 phones vs having specific game-focused phones. 

The company spent an estimated $1B+ on the effort and sold about 2M units, which was way below their goal - it was marked by a misguided initial product (remember sidetalking?) effort which violated practically every known rule about how to launch a console, mostly becuase Nokia didn't employ anyone with previous console experience.  By the time the much improved NGage QD shipped, with better pricing, unique content and an improved feature set, the market had already moved on to either simpler games in standard mobile phones, or more compelling games in handheld platforms such as GBA and PSP.  It's unfortunate since Nokia gave it a valiant effort, producing some of the most interesting mobile online content in gaming (NGage arena) as well as groundbreaking games such as Mile High Pinball and Pathway to Glory.  However, as I have repeatedly mentioned, the console business is a graveyard full of broken dreams with a seemingly never ending flow of new entrants, the latest being Korean player Gamepark with their GP2X. 

About the only winner in these types of platform failures seems to be Electronic Arts - Nokia was rumored to have paid millions of dollars (as high as $15M) to EA to incent them to port their sports games to N-Gage.  Given that Gizmondo revealed in their public filings that they commited to pay (they'll never pay it all) EA $6M for similar rights, I'd say EA still comes out ahead in these situations.

XBox 360: Cable Bypass Threat & Opportunity

Just received our XBox 360 today at the office, which has not exactly increased productivity, but since the dev team just hit a large milestone, it's a good release for everyone.  Ignoring the obviously powerful game playing aspects of the machine (amazing graphics, fairly good games), what jumped out to me was that the 360 has made massive steps towards becoming the first legitimate cable bypass box.  This means that companies could create viable video distribution models by going through the Internet rather than over the broadcast, cable or satellite services. 

With a 20G replaceable hard drive, a powerful piece of hardware, HD capability, reasonable pricing, and tens of millions of sales guaranteed, it seems clear that the 360 will be an incredible destination device for online video.  Because you can download directly to the machine as well as connect through a PC, it offers the best of both worlds from a capacity and connectivity perspective. 

Unlike other digital media adapters which have not had either the horsepower, the volume, or the HD options, this box will begin to be a viable distribution opportunity for content providers by the end of 2006, especially if MS opens up the system to outside providers, as Ray Ozzie's memo forecasts.  Depending on what Sony does with PS3, these new devices will open up a new competitive threat to today's service providers, as well as provide distribution opportunities for smaller content providers locked out of traditional cable and satellite boxes, and it will be a huge accelerant to the HD marketplace.  It's going to be an exciting 2006.

NTN Q3 - Refocus on Buzztime

Little known NTN Communcations (NTN on Amex) today announced their Q3 results, which included profits and a significant refocusing on its consumer-focused Buzztime subsidiary.  NTN is leader in out of home entertainment, known primarily for its games delivered to bars through those small wireless devices.

I am a small shareholder in NTN, having followed it for years, mostly with increasing frustration as it struggled with too many initiatives, executive turnover and declining stock price.  For a company with so many obvious options in the new digital universe, it wasn't executing on any of them.  But it feels like it's finally turning the corner, with a profitable quarter, a potential buyer for its BtoB Hospitality business, growing momentum behind its cable ITV and other Buzztime expansions, and a renewed focus on cost control.  Given that it's now profitable, growing, and well positioned in a couple of hot categories, I think that it will command a valuation higher than its current 1.7x revenues if it can nail a couple of additional quarters.