The DeanBeat: If you blinked, you don’t know how big the mobile gaming industry has become

It feels like mobile gaming is changing so fast that we could use quarterly or maybe daily updates on the state of the industry. That’s why it was good to hang out at the Mobile Gaming USA event in San Francisco earlier this week, getting downloads from some of the industry’s top minds.

Some companies like Supercell, King, and GungHo Entertainment have figured out the market. But many others are desperately trying to keep up the with mobile gaming leaders. A million developers face the challenges of getting their games discovered and acquiring users at low costs to fuel the growth of their free-to-play games. Many are having a tough time, but they’re inspired by the outliers. And folks like Michael Ehrenberg, a former marketing manager at Apple, offered advice on how to nail a mobile game launch on the app store.

“We’ve moved from million-dollar games to billion-dollar games,” said speaker Kristian Segerstrale, a game investor at Initial Capital, which invested in Supercell among other game startups. “After 13 years in waiting, the growth is almost unbounded. It has never been as exciting as it is now.”

Mobile game studios are no longer being written off purely as “lifestyle businesses.” With ten people and less than $1 million, mobile game startups can create hits that shove aside the market leaders. Major publishers don’t have the leverage they once had in games, he said. Finding talented and passionate developers matters more to Segerstrale than a big company CEO.

Above: The app store

Image Credit: Fiksu

Michael Pachter, analyst with Wedbush Securities, also observed the velocity of change. He said the U.S. retail games sector generated $22.6 billion in revenues in 2008, with digital games selling about $3 billion in that year. By 2013, retail games shrank to $12.5 billion and digital games grew 350 percent to $14 billion, with $12 billion of that driven by free-to-play games on mobile and online. He thinks that the core game business has peaked and that the current generation of consoles will not outsell the last generation. In fact, over the next decade, he said, “consoles will go away.” The installed base of consoles will likely peak around 240 million, as gains by Sony and Microsoft will soak up losses by Nintendo, he said.

Mobile user acquisition is hard, but answering a few questions is easy.
And we’ll share the results from everyone with you.

That’s a bold statement for an inveterate console game player and longtime console game analyst. He sees the biggest opportunity in PC, mobile, and tablet games. Mobile games are a $7 billion market in the U.S., with growth of $1 billion in the coming year. Tablet games are a $1 billion market, with $1 billion in growth coming in 2014.

“Tablet is growing more rapidly,” he said. “My kids will have to use tablets in public schools and use it for homework. There are hundred-dollar tablets out there. When everybody has a tablet, it will be a different market.”

Above: Mobile game market

Image Credit: Newzoo

Other market analysts are equally bullish. App Annie estimates mobile game apps accounted for $16 billion in spending, up 2.9 times from the year before. Digital gaming was $34 billion on a worldwide basis. China’s mobile game market alone is expected to hit $3 billion in 2014, according to SuperData Research. Digi-Capital predicts that the game industry could grow to $100 billion by 2017. Mobile and online will be $60 billion of that amount. In the U.S., 247 game companies made more than $1 million in revenue in mobile in the U.S. alone.

Those who are looking for the biggest game news to come out at the console-focused Electronic Entertainment Expo (E3) show in June would probably never notice something like Machine Zone’s Game of War: Fire Age, which launched on Android yesterday and could very well trounce the revenues and profits of many console game makers.

Chris DeWolfe, chief executive of social mobile game publisher SGN, said that he saw a huge opportunity in mobile because the top 100 charts in games are always changing. But that’s not necessarily the case now. The top grossing list on the Apple iTunes App Store isn’t changing much, as it is dominated by Clash of Clans, Candy Crush Saga, Puzzle & Dragons, Hay Day, and Game of War: Fire Age. But the top downloads list changes more frequently as viral hits like 2048, Smash Hit, or Flappy Bird come out of nowhere.

“We’ve seen Supercell create $3.2 billion in value in two years, and King created $6 billion in the same time,” DeWolfe said. “It’s a huge market, a growing market, and an opportunity to be creative.”

It was not so long ago that simple social games like Happy Farm were catching on in China in 2007, presaging Zynga’s FarmVille in 2009 and its initial public offering in 2011. The market hit a trough as Zynga dipped, but King revived the enthusiasm for mobile games with its $7 billion IPO, even though its value has sunk to $6 billion. The big thing to notice is not that King lost $1 billion in valuation in just a short time, but that it created $6 billion in value in just a couple of years.

In other words, if you blink, you won’t realize how much is changing. DeWolfe’s target is 45-year-old housewives, and he is trying to build a portfolio of games that can be cross promoted and target the same kind of players. So far, the transition to mobile has produced hits but not runaway blockbusters. His company has stayed relatively small, at 100 people, and it has remained profitable.

“Initially, we were going for a volume play,” DeWolfe said. “If you’re looking at the top grossing games, they’re the games with tremendous polish, great art, and amazing game mechanics. That’s what we’re trying to do. We’re looking at four or five games a year.”

Andrew Sheppard, president of Kabam Studios, has also made the transition to mobile with Kabam’s strategy games. Like DeWolfe, Kabam isn’t going for one big hit. It’s developing a full portfolio of games in different categories with a primary focus on core strategy gamers.

Above: Mobile game publishers

Image Credit: Fiksu

He said development costs can range from $2 million to $6 million on a mobile game, with more going into big-budget projects like The Hobbit: Kingdoms of Middle-earth, which has a team of 75 developers. Kabam can afford to run such teams as long as its games continue to generate revenues. The company doubled revenues last year to more than $300 million.

“Mobile is an incredible platform, with 35 percent growth in mobile revenues over last year,” Sheppard said.

But while game companies are becoming more disciplined, the competition is growing on a global basis. Mobile gamers are fickle; 19 percent of new players open a game only once, according to Fiksu. And 66 percent of players never play a game again after the first 24 hours.

Many game companies work hard on their designs and they find they have to work equally hard finding distribution and acquiring users. Doing this stuff can be very complex, in comparison to publishing games on the web. In other words, there are still times when it can “still suck to be a mobile developer,” quipped Emily Greer, cofounder of GameStop’s Kongregate platform.

DeWolfe said that you can’t throw around user acquisition money like a drunken sailor. You have to study the audience and make sure that every single new user is acquired in a profitable way. That means good targeting via Facebook or other tools.

New ad technologies like real-time bidding and programmatic buying are becoming popular because they match the right ad to the right user at the right time. Glenn Kiladis, vice president of new market and media solutions at mobile marketing firm Fiksu, said that by optimizing your ads, you can bring down the cost per install (or the advertising cost that it takes to get a user to install an app) from $20 down to $5 through programmatic methods. That ensures that your advertising costs don’t outrun the revenues you get from those users.

While this kind of improvement from ad technology is promising, Kiladis noted that the mobile middlemen have become fragmented and confusing. Fiksu tracks 945 mobile ad-tech companies. That’s tough for mobile game makers to sort out.

Above: The ad-tech market

Image Credit: Fiksu

David Helgason, chief executive of game engine maker Unity Technologies, said that mobile “kind of shitty when we launched in 2005.” But as iOS and Android came along, the industry grew at “ridiculous rates,” he said, and his company became the make of the picks and shovels for the gold miners in the Gold Rush. In the last month, 630,000 developers used Unity’s tools to make games. Developers are sharing their creations and selling them on Unity’s own store, adding them at a rate of 500,000 a month. That’s adding a new layer to Unity’s economy.

“Three years ago, nobody had much experience with mobile,” Helgason said. “Now it’s common to see teams with five years of experience. The quality of the games is mind-blowing.”

Above: Dean Takahashi and David Helgason at Mobile Gaming USA

Image Credit: Steve Peterson

Greer at Kongregate said she is encouraged by all of the lessons that her company has learned as a developer and publisher of free-to-play mobile games. Kongregate created a $10 million fund for mobile developers, and it has 10 live games that have gotten more than 15 million downloads in the past nine months.

Focusing on one sci-fi collectible card mobile game, Tyrant Unleashed, Greer talked about the lessons she learned from it. The game did OK after it launched in August 2013 on iOS and September 2013 for Android. Kongregate did some paid acquisition, with campaign costs ranging from $1.56 CPI to $6.10 CPI. It took a while to get returns based on those ad costs.

“It takes deep pockets to make something take off,” Greer said.

But it really took off after Google featured it a number of times. Then it took off. The first lesson of that was to be patient. Word of mouth helped it take off further. The mobile version of the game monetized two to three times better than the Facebook version. After ticking off 22 lessons in her talk, Greer concluded, “Mobile is a ‘sprint-a-thon.’ You have to be prepared to support a game for years, but it’s always a bit of a sprint too.”

While some folks are busy passing out advice, others hope the rules will change again. Rob Grossberg, CEO of Tresensa, is distributing HTML5 games on a new distribution platform that delivers games in the browser and getting them in front of users through a variety of channels, in addition to using traditional app stores. The hope is to further liberate indie game makers from the power of platform owners by providing ways to bypass those platform owners. He points to interesting new platforms like Kakao, a mobile messaging network that sits atop the mobile network and provides new ways for games to get discovered.

In such a fluid market, he said, it’s easy for new companies to get started.

As for raising money, “it’s easier to come by money today than it has been in many years,” Segrestrale. “There are more examples of successful product. More potential future acquirers. There is a public market perception that is still unclear. But there is some sense of what the end result will be for an investment.”

Segerstrale didn’t direct game developers toward a hot sector. Rather, he said that you should find the intersection of the games you are really passionate about and the games that you think are going to make a lot of money in the market. Never, he said, make a game that you don’t believe in just because you think the sector is hot.