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It's All Fun and Games (and Data Mining) at JAMDAT Mobile

It's All Fun and Games (and Data Mining) at JAMDAT Mobile

Anticipation is a key factor in figuring out what will happen in the wireless industry over the next couple of years. As entertainment migrates to the handset, it's predicted that revenues from games on mobile phones will reach $6 billion by 2005. How? Many questions remain, but there are some strong players joining in to find the answers.

Do you remember Carnac the Magnificent? One of the most enduring segments of the pre-Leno Tonight Show was arguably host Johnny Carson's portrayal of the mystical Carnac. His turban and cloak-wearing character could divine the answers to yet-to-be-asked questions that were "hermetically sealed" in envelopes, and presented to him by sidekick Ed McMahon. These "answers" ended up being little more than seemingly unrelated words, statements, or names. To great comedic effect in many cases, Carson's Carnac character would tear open each envelope seconds after stating his predicted answer, and the question would amazingly link them together.

"Until he gets caught" is an example of one of Carnac's answers, given after channeling his mysterious sixth sense. After opening the envelope and reading, "How long does a United States Congressman serve?" trusted crony McMahon would once again beat the audience to unabated laughter. Amazingly, McMahon would even laugh on cue when he was the source of the ridicule. "Name three people who sell a lot of junk" for example, preceded by Carnac's premonition of "Sanford and Son and Ed McMahon," referencing the latter's ongoing career as an advertising pitchman.

At this point, "nothing" might be your answer to "What the hell does this have to do with venture capital or the mobile industry?" And rightfully so. But be patient.

You know you've stayed up too late channel surfing when you begin to notice the infomercial tide coming in. First it's a revolutionary kitchen product or two, followed by a fortune teller and a would-be exercise guru. Soon enough, the only escape from the next turbo hair removal system, weight-loss miracle, pet-therapy product, hair-growth compound, greatest hits collection, tooth whitener, too-hot-for-TV exposé, or mortgage refinancing deal of the century is to quickly move on to the next channel, or to turn off the power altogether.

Worse yet, if you're up that late, there's a good chance that the programming options offered opposite these infomercials aren't much better. The principle at work in the wee hours is that the networks can sell an entire 30 minutes to an advertiser for more than they could make selling spot advertising during 30 minutes of a late night B movie or syndicated rerun. Most of the 3 a.m. nightstalkers are obviously in need of lawyers, miracle cures, and psychic friends; they don't need another dose of Johnny Carson.

But I might. After seeing a pitch for his "Favorite Moments from The Tonight Show" videos, I now have a new favorite infomercial. Or to use the industry lexicon, it's my favorite form of "paid programming." The clips of Carnac the Magnificent made me recognize just how many companies in the wireless space have seemingly come up with their "answers" before the appropriate "questions" have even been presented.

JAMDAT Mobile of Los Angeles is one of these companies. But unlike most, they have a diversified bank of intellectual capital on their side that should help them anticipate the hurdles that the wireless industry will face over the next two to three years as entertainment migrates to the handset. And thus, today's answers can be tailored to address tomorrow's questions.

Multiplayer Gaming
Mobile games are likely to be a key consumer-demand generator, propelling wireless operators into the realm of revenue-generating mobile data services. Remember that short messaging and stock quotes aren't likely to pay off any 3G license auction debts. At face value, words such as Snake and Gladiator might more likely be the answers Carnac would give to "name two of your grandmother's tattoos" than examples of real significance in the history of wireless communication. But they may one day achieve a PONG-like stature as catalysts for the mobile entertainment industry. (I use the terms gaming and games interchangeably, with the understanding that I'm not referencing mobile gambling, which is sure to find its own market in the years to come.) Snake, an embedded game that has resided for several years in many Nokia phones is fairly well known, and Gladiator is JAMDAT's current multiplayer hit on the Sprint PCS network.

Yet the population at large probably doesn't recognize the trailblazing importance of these games. Today, multiplayer applications are serving as the proving grounds where the battles over revenue sharing, billing, and handset form factors are being waged. The promise of multiplayer gaming is indeed the promise of mobile data in microcosm. "As we see greater uptake of more sophisticated gaming applications, we will, in turn, see a decline in embedded models," according to Rupert Reid, lead author of the UK-based ARC Group's "Mobile Entertainment" report.

PONG Led the Way
PONG, as you'll recall, was the Carson-era console game that spread like a digital plague during the mid-'70s. So much so that the Bresien family received the deluxe Sear's version one Christmas that included not only PONG, but doubles, hockey, and soccer (all virtually indistinguishable variations of blips and lines controlled by the same rotary wheel). The PONG legacy is sometimes a punchline and a barometer for all that is overly simplistic or barren of robust visual appeal. But this is unfair.

PONG defined what is today a multibillion-dollar industry, and served as a stepping stone for those hardware and software developers who followed. Remember also that PONG utilized a form factor (the television screen) that was designed for a far different purpose and, at one time, there was surely high skepticism about whether consumers would allow their television sets to be turned into video game terminals. But these concerns were allayed as PONG became a hit and proved the business case for the wildly successful Atari 2600 video game console and the others that followed.

The dynamic nature of the video game industry is not necessarily native intelligence that flows freely into allied fields of endeavor though. That may be why we haven't seen the console video game developers rushing headlong into the wireless space. Generally considered a youth-driven (and male) market, the video game industry as a whole has unique patterns of development, hardware life cycles, and hard-to-quantify x-factors. (If it didn't, we would all likely be living in the United States of Atari by now).

When the topic of mobile gaming is raised today, especially considering the far-out launch windows for robust 3G networks, the subject is sometimes met with apathy (or better yet, WAPathy). But this is usually due to a lack of perspective. Few VCs would be overwhelmed by thoughts of seeding a pure gaming company.

In fact, even the companies that produce video games for Nintendo or Sony PlayStation consoles run from the term. They refer to themselves as "interactive entertainment software publishers," and although they surely have an interest in seeing their titles running on every platform, console, PC, PDA, and handset in the future, they won't wade into uncharted wireless territory without guaranteed returns.

While it's true that most of today's mobile handset game offerings visually resemble lines, dots, and stick figures, more compelling content will emerge as the hardware and networks evolve. The research firm, Datamonitor, predicts that revenues from games on mobile phones will reach $6 billion by 2005! Attempting to identify and solve the issues that need to be addressed in order to arrive at those figures isn't easy, and will require a diverse skillset.

Games Are Attracting Big Players
Born in March of 2000, JAMDAT Mobile is the progeny of the Sprint PCS and eCompanies Wireless incubator in Santa Monica, California, and has been further financed by a group of investors who will likely point the way to a lion's share of future mobile entertainment revenues. With the increased attention paid to J2ME lately, and the momentum building behind BREW, you have to be intrigued by the fact that both Sun Microsystems and Qualcomm have invested in JAMDAT Mobile. JAMDAT's first external funding round was led by private equity firm Patricof & Co., which counts GoAmerica, AirNet, and MeshNetworks among its portfolio of companies, and included the Intel Communications Fund, Qualcomm Ventures, and Sun.

There are plenty of upstarts in the gaming field with names like nGame Limited, HIPnTASTY, NuvoStudios, iFone, Picofun, Springtoys, Riot-E, Unplugged Games, Indiqu, Froghop, Inc., Boxerjam, Digital Bridges, and And as Java- and BREW-enabled phones hit the market, the barriers to entry for new gaming entrants may actually be lowered, so many more could appear.

Having trouble envisioning Hangman and tick-tack-toe generating $6 billion in the next four years? They won't. In much the same way that PONG served as a catalyst for the video game industry, these first-generation games will create some initial interest until demand spreads beyond the early enthusiasts to the mass market. It will happen. But on which platform? On whose network? In which countries? At what price points? In which demographic? By which billing model? Billed by the gaming minute or billed by the bit?

"There is no one killer application - consumers need a wide range of compelling content in order to be attracted to mobile data services," says Datamonitor analyst Panni Kanyuk. "Funky, personalized color applications, with plenty of interactive features delivered just when and where you want, it will make it a killer."

"Carriers believe games are the first killer applications," says Laura Lilyquist, director of strategic investments at Sun Microsystems, "and Sun wants to be at the forefront of putting those solutions together. From a technology perspective, we know that games will push the technology limits the hardest. We want to see what breaks, where new technologies are needed, and how we build business models that work for everyone."

Whenever there's an apparent sea change within the telecom industry, a "Wild West" mentality develops among vendors who begin to jockey for positions of perceived advantage. In the wireless industry at large this is evident in many layers. Just think of the competing standards! Every standards body and market initiative must be studied carefully for its potentially subversive qualities, but since mobile entertainment has not yet crystallized into a bona fide industry, it would be premature to try and map the landscape or handicap standards efforts. Plus, it's hard to quantify just how many games are being developed today for mobile environments, and for which platforms.

J2ME and BREW are met with enthusiasm among the gaming and entertainment developer communities, and you can see that Ericsson, Motorola, and Siemens are moving along a similar path since they announced plans to define and develop a Universal Mobile Games Platform in March. "Club Nokia" was created to offer customers a point of reference for future developments. The Mobile Entertainment Forum, formed in late 2000, announced a Commercial Standards Committee this past June to address the fundamental issues of end-user billing, revenue sharing, and cross-operator gaming. They also plan to create a task force charged with pursuing standard pricing models. But make no mistake - this sector is still in its infancy. And you can never discount Microsoft's yet-to-be-launched Stinger project. So where does that leave JAMDAT Mobile?

JAMDAT's Positioning
The company has a dual approach to this nascent market. They'll continue to push forward as a game publisher, capitalizing on their early success and the game publishing acumen of the company's management team. CEO Mitch Lasky is the former vice president of worldwide studios at Activision, and numerous members of the JAMDAT crew are Activision alumni as well. They'll also offer private label solutions to help other traditional game developers enter the mobile entertainment business with a minimum amount of risk.

Perhaps more significant to their investors is JAMDAT's focus on data services for wireless operators. Their EUREKA data-mining product provides carriers with real-time access to mobile entertainment usage data. Games from other vendors can be integrated into the system with very little effort. It stores data in XML format, and can be integrated into carriers' existing customer databases and CRM. Dr. Shumeet Baluja, the company's CTO, was formerly chief scientist at Lycos, where he was responsible for the quantitative and qualitative analysis of user behavior, including data mining and trend analysis.

"What drew me to JAMDAT was the combination of gaming industry experience, technology strength, and wireless carrier perspective. I didn't see anyone else with all three angles," says Sun's Lilyquist "I know that they'll be successful by harnessing all three knowledge bases."

While other companies may shop their various "platforms," JAMDAT doesn't even like to use the term. "The platforms are J2ME and BREW in our minds," according to Austin Murray, the company's VP of business development, "and we're going to support both." The majority of JAMDAT's employees are engineers, and they're not particularly interested in using their resources to code games onto every new start-up platform that comes along. "It's the businessman's dream to get in the middle of the revenue stream," says CFO Michael Marchetti, predicting the reasons new industry players might be tempted to push their own proprietary "platforms."

Predictions for the Mass Market
When I met with the company in July, they were content to work with today's wireless operators on revenue-sharing deals with an eye toward the adoption of J2ME- and BREW- enabled handsets in the near future. Marchetti, a former VP of Investment Banking at Merrill Lynch, is a firm believer that subscription-based models will eventually prevail. The JAMDAT approach is to work within the "cell phone market" of today and migrate toward the more robust environments that will emerge over the next couple of years as newer handsets are deployed.

They launched their WAP-based Gladiator game with seed money from eCompanies and watched it become a hit. Murray proudly says of Gladiator, "We made a hard-core game for hard-core gamers - the early adopters." The company is studying these users, which now number more than 850,000, so they can readily adapt to the next generation of entertainment consumers when demand reaches the mass market.

The management team at JAMDAT is confident that they understand game adoption and penetration cycles, having lived through them at Activision. What's more, they recognize that handsets are replaced much more rapidly than other devices, while the average video-game console life span is about five years. Things are bound to move fast for both handsets and content publishers over the next two years.

As I was writing this article, another of the company's games, Golf, was moved to the top position on Sprint's game deck, a sure sign of surging popularity. Sprint PCS also recently released their first U.S. handset with a color screen (the Sanyo SCP-5000).

Speeding the Development
While games are important to the company, data mining and integration within carrier networks may ultimately separate JAMDAT from the rest of the pack. Multiplayer games and cross-platform games are among the most demanding types of mobile data that we'll see in the near future. Photographs and text messaging won't test the limits of operator networks to the same degree.

"JAMDAT represents a strong player in the mobile entertainment space and features a technology roadmap that can significantly benefit from our Intel Personal Internet Client Architecture - a hardware and software framework designed to accelerate the development of wireless Internet applications and devices," says Intel spokesman Daniel Francisco. "As with all of our investment activities, our goal is to help grow ecosystems, and with Intel PCA, our specific aim is to help grow the wireless Internet. Therefore, we invested in JAMDAT to help speed the development of applications and devices for the wireless Internet."

It seems that most of the Sand Hill Road venture capitalists in Silicon Valley are still a little gun-shy when it comes to investments in the "content" space, especially after so many dot-com flameouts. So maybe it makes perfect sense that the vendor and wireless operator communities would take an active, early investment role with a company like JAMDAT Mobile. I would look for this trend to continue. Whereas early stage venture capital firms usually take the initial risks associated with funding start-ups, this new wireless segment truly depends on a three-headed perspective: the wireless operator, the game publisher, and the infrastructure/handset manufacturer.

The answer is content. It always has been. Compelling content, whether information or entertainment, will drive the demand for services, next-generation networks, handsets, chipsets, and inevitably, more content. JAMDAT Mobile and its impressive group of investors may already know how we get there from here.

More Stories By Tim Bresien

Tim Bresien is WBT's VC editor, the principal consultant with infraStar, Inc., and a freelance writer covering investments in the wireless communications sector. He is a former research analyst with the telecommunications consulting firm of Bond & Pecaro, Inc., Washington, DC, and a cofounder of the Telecom Investor Forum, held annually at SUPERCOMM.

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