Not Just Playing Phone Tag

0

With the video game market on hold until the next generation of consoles start arriving in stores, Wall Street is turning its attention and its frustration toward the mobile gaming sector.


That’s bad news for Los Angeles-based Jamdat Mobile Inc., the biggest game player in the cell phone market with a 15 percent market share.


Jamdat found early success with a few simple blockbusters: the classic “Tetris” puzzle, with its falling blocks of different shapes; “Bejeweled,” where players rearrange colored gems like a rushed Rubix-cube session; and “Downtown Texas Hold ‘Em,” offering quick rounds of poker.


But Jamdat is now fighting competition from new companies piling into the category, just as its own cash supply has been depleted. Meanwhile, executives have been preoccupied with a lawsuit filed against a company with a similar name. Shares have fallen by nearly half since July, shortly before it lowered its earnings outlook.


“There have been a whole bunch of concerns piling up right now on mobile games,” said Kevin Dede, wireless technology analyst at Merriman Curhan Ford & Co. in San Francisco.


The biggest worry is the glut of game companies that have entered the sector, many backed by venture funding or larger video game publishers.


U.K.-based iPlay Inc. licenses and develops Electronic Arts Inc. games for phones; San Mateo-based Digital Chocolate Inc. was founded by EA founder William (Trip) Hawkins and funded by Kleiner Perkins Caufield & Byers; and San Mateo-based Sorrent Inc. is run by two other former EA executives.


Big developers are also in the game: Agoura Hills-based THQ Inc. has a wireless division, THQ Wireless Inc.; Santa Monica’s Activision Inc. is developing phone games, as is Walt Disney Co. But Dede remains positive about Jamdat’s growth prospects.


Jamdat’s biggest strength, said James Lee, an analyst with America’s Growth Capital, is its understanding of the distribution network and its strong relationships with carriers. Consumers need to purchase games through their phones, with the charge appearing on their monthly bill, so carrier relationships are key.


Consumers choose games from an on-screen menu, and the more prominent ones get chosen the most. This is leading to talk of consolidation. “The carriers don’t want to have to deal with 50 different companies. They want to deal with half a dozen or so,” Dede said.


But Jamdat’s reliance on phone carriers can also be seen as a weakness. More than 65 percent of revenues come from Cingular Wireless LLC, Sprint PCS Group and Verizon Communications Inc., according to Dede, and all of that revenue is shared. “They’re so dependent on their carrier relationships,” he said. “And there are so few of them.”


To broaden its reach, 5-year-old Jamdat is expanding overseas and looking for new ways of distribution.


The company has been publishing games in Europe and Asia since 2002, but 85 percent of revenues still come from the U.S. In September, Jamdat expanded into India with a local wireless carrier. In October, it brought “Tetris” to Japan. In September, it brought “Jamdat Bowling” to South America and “Texas Hold ‘Em” to Europe.


The company also is using a revenue-sharing agreement with RadioShack Corp. to gain new distribution channels. Jamdat games are being sold at 5,000 RadioShack locations, where employees will walk Sprint or Cingular customers through the process of downloading the games.


Minard Hamilton, executive vice president of sales and marketing, said he hopes the company can apply the RadioShack model elsewhere.


Chief Executive Mitch Lasky helped spring Jamdat Mobile out of the Santa Monica-based eCompanies Wireless incubator in 2000, and the company garnered early investments from Sun Microsystems Inc. and Qualcomm Inc. (Before that, Lasky was executive vice president of worldwide studios for Activision Inc.)


Lasky has pursued growth through acquisition, gobbling up smaller mobile game companies like Downtown Wireless for an estimated $8 million in January, and dropping $137 million for the exclusive worldwide rights to Tetris last spring.


But with the current cash balance hovering at $21 million, nobody expects more acquisitions soon. “Their cash balance is pretty low right now. What I would expect is to see some more licensing deals with game studios,” Lee said.


A bigger question is whether consumers will take to a new generation of more complex games based on console-game franchises.


Jamdat just released id Software Inc.’s popular “Doom,” a complicated role-playing game set in its own universe. These games are expensive to make and can’t be experienced fully on most existing cell phones.


“You’ve got to ask yourself about the kind of bandwidth available for those kinds of game systems here, and it’s quite limited,” said James Korris, video game expert and creative director of the Institute for Creative Technologies at USC.


Another distraction is an August lawsuit filed against VeriSign Inc. for its Jamster subsidiary. Jamdat claims that the name is too similar to its own, and plans to spend $1 million on the suit. That makes investors nervous.


“I’m not really sure why management is so adamantly going after Jamster,” Lee said, pointing out that 75 percent of the company’s business is in ring tones, not games. “It’s a vastly different offering.”


Jamdat declined comment on the lawsuit.

No posts to display