SharkJumping

I just came from the Mobile Entertainment Show, which Moco.news covered here.  One of the most interesting panels was the Music one where label executives continued to insist that we would see broad adoption of full song downloads at $2-3 per track, even though it would often not be fully transferable to other devices and even though the prevailing Internet price is $.99 per track.  The general argument is that the convenience of quick, mobile downloads to a phone with great audio capabilities would over time carve out a large market versus those who wish to download through a PC for a lower price.  The other part of the argument is that mobile users now pay $2 for a 30 second poly ring tune, and $2.50-$3 for an MP3 ring tone, so they will have few problems paying $3 or more for a full song, especially when you see what's happened in Japan with the success of KDDI's full track service (in a market where iTunes Store does not exist).  It's simply wishful thinking.

The fact remains that many of us will have MP3-capable phones by 2006/2007, and the distinction between ringtones and full tracks will go away - it will be very easy to take existing MP3's (the vast majority of all music catalogs), move them to phones, and clip them to 30 second lengths, no matter how much carriers attempt to disable various transfer methods.  Yes, there will be DRM issues, Apple Fairplay issues, etc., but this process will get much easier due to broad availability of 3rd party software which will simplify this process - consumers will quickly figure out the value proposition and the vast majority, especially savvy younger users, will transfer music from PCs and friends rather than pay much higher rates for the mobile delivery - you already see early signs of this in the European markets.   Mobile music pricing is going to move down towards the $.99 level, not up to the $3 level as the technologies evolve - it's too late to put the genie back in the bottle. 

I believe that mobile music will be a huge volume business and a large profit center for labels, just not at the margins/prices that they are currently signalling since consumers and service providers won't allow that arbitrage to take place.

Since Donnerwood is going to be a consumer-facing enterprise, we need to have a billing system.  Luckily, one of our employees built the entire billing system used by Listen.com/Rhapsody, so we know how to do it, but we really want to have him do more value-added work since there is no more gain in having your own billing system than there is in building your own ad serving system.  Doubleclick and others addressed this issue by creating ad serving & tracking systems, but I have to say that there is a serious lack of similar players in the billing sector.

Billing in the consumer sector is deceptively easy at first.  You just want to take credit cards, so you write a simple interface for Cybersource and call it a day.  But then the world starts to get more complicated... you want to allow for subscriptions and micropayments, and integrate PayPal, and give refunds, and tie into your customer service system, and offer coupons, and offer alternative currencies, and tie into your financial systems, etc - get the picture?  Pretty soon you have a small team working on a system which is crucial for your business, but which has practically identical functionality as 100 other systems.

So not wanting to build it ourselves and not being happy with the open source alternatives, I asked more than 25 comparable companies what they were using - these were all consumer-facing internet firms, with sales from $1M to $50M+.  Every single one had built their own system and no one thought it was a competitive advantage!  It's simply mind-boggling.   We kept searching and finally found a provider to help us - we're still under NDA, so we can't talk about it until launch, but it looks like they will fit the bill, outside of requiring an Oracle database (must work with MySQL in future) and not yet being integrated with Paypal (hopefully coming soon).

Has anyone else found billing systems which work for them?  If not, tell your local investor to go start funding some...

UPDATE:  our previously secret billing provider is - (they acquired another provider called Sandlot) -  they have been in the billing business for years and they appear to have the best solution for what we and many other similar services need.   We have yet to fully deploy them, but outside of the tweaks I mentioned above, they look like a winner at this point.

One of the most savvy online brands, Major League Baseball Advanced Media's MLB.com, has launched a casual game offering called , which appears to be powered by Trymedia.  What's interesting about this?   You would assume that the majority of their audience is NOT in the typical casual game demographics of 35+ yr old women, yet they see a market opportunity to offer a wide range of casual games to their massive online audience.  And even though most sports video games are twitch or console-oriented, MLB.com is also a publishing a new casual baseball game called which is a match 3 game with a baseball theme - it may not break new boundaries with its game play, but it's good to see additional themed content coming to the casual game category.  Read the release .

Wild Tangent recently launched a intriguing casual downloadable single player role playing game called Fate - if you have not tried it, check it out - Gamespot review is here.  Some gamers have referred to it as "Diablo Lite", usually with some type of insult following, but I think they're missing the point.   This is an easy game to get into, it's in a popular genre, and it provides a lot of value in the first 3 levels, encouraging you to buy the whole game.  The dial-up download is hefty at 27MB, but I think that almost everyone is going to go for the richer full media download at 125MB - this violates the so-called 10MB rule of casual games, but that's the point - it's time to reconsider the accepted rules of casual games and begin to expand into alternative game play and alternative demographics - not everything can be a puzzle game.  Fate may not be perfect, but it's a good start.

To the surprise of approximately one person who has been living in a cave since World War 2, one of the major music labels (Sony/BMG) today announced the $10 million settlement of a case with NY Attorney General Spitzer regarding its radio promotion practices.   The payments by some labels to radio stations to promote certain music was outlawed in the 1950's in the infamous "payola" scandals, but it's been a thinly kept industry secret for years that variants of this practice continued through the use of independent promoters.  Expect more settlements from additional labels, and it's unlikely that the large radio networks (which actually accepted the cash & gifts) are going to escape unscathed.  Score yet another one for Spitzer...It's sometimes hard to understand what law enforcement has actually been doing for years in these segments where every one knew about these types of practices, whether it's insurance or radio promotion.

Update:  Spitzers office has posted a PDF with a variety of the incriminating documents    Amazing how brazen and routine this activity was, given that it's entirely illegal.

Macrovision announced that they would spend $30M+ to acquire Trymedia, a key technology/DRM provider for the casual game sector and that it would form a video game division within the company.   This shows the growing importance of the downloadable game business since Macrovision is a key security and technology to provider to much larger categories such as DVD's and Music.  The important question to me is what happens to the game distribution business of Trymedia, which is typically not a part of Macrovision's business model since it arguably competes with its technology customers.

Unlike the last couple of years, it's becoming clear that the west coast market is tightening up for talented employees with experience in consumer-facing businesses.  At the Casual Games conference, everyone seemed be hiring, with what I believe was Pogo.com actually making a plea for resumes from the panel.  Given how many start ups are being funded by VC's right now, I think we'll see a tough labor market by Spring 2006, whether it's search, shopping, mobile, or digital media.  This means companies really need to look at their overall compensation structures, as well as consider alternative options such as using off-shore firms and or offering more flexible work policies in order to attract and retain smart employees.

On that note, we're hiring for 5 positions right now, and it's a great place to work  :).  www.donnerwood.com

The Contracts and Royalties panel at the Casual Games conference was easily the most interactive and informative discussion of the show. The moderator had asked the participants – (Greg Mills - , Rich Roberts – , David Nixon - Oberon Media, CJ Wolf – iWin, and Margaret Wallace - Skunk Studios) to put together business diagrams explaining how they each believed the margin split should work among the various players in the casual games value chain – developers, publishers, DRM providers and distributors. As one might expect, the content creators thought that distributors should receive about 30% of the revenue, while Greg Mills put the distributor number at 50% or more, much to the displeasure of many in the crowd. The panel then became a little bit of a critique of the distributors, with RealArcade taking the brunt of the abuse as the original creator of this system.

What was not brought up was that this perceived margin share imbalance is simply due to business leverage - there is no law of physics that says distributors should receive only 30%, even if that is common in many physical media businesses. This may not be a popular statement, but the developers/publishers currently need the distributors more than the distributors need them. A similar case exists in the cable world where a distributor like Comcast receives 60%+ of the margin since the content providers absolutely must have carriage on the platform – and this is for a much more mature business than casual games. No one says that content creators must distribute their content through companies such as Shockwave and – if they’re unhappy with the margins, then publishers should withhold their content. When I brought that up with various developers, they quickly stated that they wouldn’t be able to make enough money without strong distribution, which leads to the obvious margin split we now have which favors the distributors.

So instead of sitting their complaining about it, what should content creators do about this perceived problem?

1. Make Great Games – this seems clichéd, but providing a hot game or preferably, set of hot games, will increase your leverage. Merely making clones of Zuma or Feeding Frenzy may have worked last year, but it is going to be increasingly less effective in a more competitive environment.
2. Aggregate a Critical Mass of Games – distributors want to work with fewer content providers – Greg Mills made it clear they wanted to limit it to 4-5 providers at AOL. A distributor can’t continue to do contracts with tens of providers – it just doesn’t scale in a larger market. At Listen.com/RealNetworks, we signed over 200 label agreements before we finally made the call to funnel all new labels into a distributor such as or – it’s going to happen in this market.
3. Strike Exclusive Deals with Distributors – it may make sense to strike a limited time exclusive (or even longer) with a certain Distributor in return for a better margin      splits and additional promotion. It has the risk for alienating the other ones, but I think we’ll see more of it as Distributors look to differentiate their offerings from the      competition
4. Market and Brand your Games/Company – as was pointed out on the panel, most content providers do a great deal of their own marketing – e.g. MTV doesn’t wait for      Cablevision to promote their channel – they drive demand themselves. Almost no developers/publishers currently do a lot of marketing to drive demand and create awareness – that may not have been necessary in less competitive times, but it’s      becoming necessary now
5. Work with Smaller Distributors, including non-US ones – it’s likely that a content creator can get better terms from smaller distributors, especially if they work with them closely as opposed to shipping them the identical product. This takes more work, especially outside the US, but content creators need to get more creative in  how  the look at the  marketplace

I’m sure there are many additional ways to address this issue. But they all come down the inexorable fact that the casual game business is going to get harder and more complicated for all players, but that those content creators who can deal with the new landscape will actually come out ahead as the business expands, just as always happens in maturing media markets.  It will not be business as usual by 2006.

As massively multiplyer games grow in importance, both core and casual, there is a lot of discussion about what the actual subscriber numbers are for certain games, and what is the potential overall market for these games.  Anyone looking for the best data on the topic should check out MMOGchart.  It's an independent site run by an individual named Burce Sterling Woodcock which focuses on collecting the subscriber numbers of the top games through a variety of sources, and providing a basic analysis of the MMOG trends - it's a great tool for understanding the category, and anyone interested in creating MMOG games or investing in the category would be well served to speak with him.

With all of the focus on very high budget massively multiplayer games such as World of Warcraft, Everquest, etc, a lot of people have missed an under the radar success known as Runescape.  This is a simpler, java-based, massive multiplayer game in the fantasy genre which you can play for free as long as you want, but  which offers a more robust set of features if you become a paying member at $5/month.   This is a similar model to a lot of casual downloadable games which give you some type of gameplay for free, but then ask you later to pay to own the game or to access the higher end features.  It's easy to get into and runs on a wide range of machines, although the graphics and overall polish are certainly not in the range of a WoW. 

Why is it interesting?  Because they report more than 300,000 paying subscribers, most of them in Europe where the company is based, and they're rumored to be quite profitable.  Take a look - with all of the hype around big budget titles, I think Runescape (and of course, Puzzle Pirates) show a more interesting way for smaller creative companies to address the massively multiplayer sector with far less risk, and I think it's a better area for investors as well.

Coming on the heels of the Casual Game conference, iWin announced a 3rd party publishing deal with gameLab, (http://biz.yahoo.com/prnews/050722/sff016.html?.v=18) extending iWin beyond the self-developed game category. 

You'll see more of this as the mid-upper tier players in casual games begin to expand since they want to be one of the few major players that the distributors will cut deals with in the future.  The smaller developers will either be acquired, go away, become niche life-style businesses, or will need to creatively think about how to deal with a more competitive sector.

Due to my previous experience at Listen.com/RealNetworks, I seem to get a lot of business plans and questions about digital music.   When starting Donnerwood, we spent a lot of time looking at the music business, and we were simply not smart enough to discover a sustainable way to drive value in that sector.   

Why is that?  At the end of the day, you have what I call a "serial monopoly" of 4 suppliers (labels), meaning that it's more difficult to get reasonable music rights than it is negotiating with an oligopoly like OPEC since Eminem and Norah Jones are not substitutable, while crude oil from Mexico and Saudi Arabia is relatively substitutable.   This is not a knock on the labels - in fact I spend a lot of time defending labels who generally act according to what they believe their best interests are - it's simply a matter of leverage - a start up needs to have rights from all of the major labels (EMI, Sony/BMG, Universal, Warner) and most of the smaller ones in order to compete in the sector, and the lack of those rights generally cripples the business - therefore, there is essentially no negotiating leverage, which makes for very low margins.

To top it off, you need to pair those low margins/lack of leverage with an intensely competitive marketplace, with RealNetworks, Napster, Apple, Sony, Yahoo, Wal-Mart, MSN, and a host of others all marketing like wild, discounting the product (MSN's buy 1, get 5 free), and trying to cut exclusive content deals.  Only Apple has truly managed to show profits in the business, primarily through sales of related hardware, and finally, through an 80% market share of the download market, but it's must just be brutal for the others.

I think digital music will eventually be extremely profitable for the content providers, including publishers, but I struggle to find a business model for the middle man in this business, at least for any model which requires broad label rights.  And when you consider the joys of the mobile music sector, where you have both a concentrated supply chain AND a concentrated customer base (4 -6 carriers), you begin to see why I find that sector to just be a disaster in spite of the hype.

So we will most certainly not be in the digital music business here at Donnerwood, primarily due to our collective experience in it over the last 5-10 years, but I have no doubts that companies will continue to pour resources into it.

Just a play on words from the infamous "Jump the Shark" Happy Days story arc where Fonzie goes to Hollywood.  Here is the wikipedia definition, or I've attached a photo from it which clearly  points out how ridiculous the episode was.

How do you know when a market sector is hitting a frothy note?  When a private investor sitting next to me at the Casual Games conference says that he historically invests in Oil and Gas, but that he thinks that Casual Games will be the next big thing.  Someone please sell him a company :)

Just came back from the First ever Casual Game Conference in Bellevue.   The event was well attended, with over 400 people, and the mood was generally quite optimistic, with seemingly every company in hiring mode.  The market is currently in a rare early stage where all parts of the value chain are making money - the developers, the publishers and the distributors.   Depending on who you believe, the casual game market will be about $300M this year, which is around the same size as the mobile game market in the US.

People know that I believe very heavily in the growth potential for this game sector, but it's also clear that the market is about to shift, causing a lot of pain in the existing players.   What are the primary trends?

1. Increasing Development Costs - games used to cost $50-100K - now higher end games are crossing the $200K threshold.  There is no sign that the trend will slow down since certain higher end players will push it to differentiate their products.
2. Content Over-Supply - due to the low barriers to entry and current wide spread profitability, there are increasing numbers of market entrants in the developer/publisher sector, and the existing players such as PopCap and Gamehouse, all appear to be increasing their production.
3. Lack of Innovation - most developers admitted that they would continue to develop the same types of games that had worked in the past - there are only a few themes, and it seemed as if every possible variant on them (how many DinerDash clones can there be?) was in development.
4. Inevitable Reduction in # of Content Suppliers to the Big Distributors - the big 4 (RealArcade, Shockwave, Yahoo, and AOL) are going to begin to limit how many people they deal with, especially as the game supply increases from the large suppliers.  Greg Mills from AOL was willing to admit it - they want 4-5 large suppliers with large sets of quality content - the days will soon come to an end where small developers can do deals with the major players, just like what occurs in every market, including my former business, digital music, where smaller labels are now pushed into aggregator relationships such as with .  No one wants to have 200+ contracts to manage.
5. Prices will Generally Decrease - this is the more controversial opinion, but most players will privately admit that games are now mostly in the $15 range vs $20 retail.  There may be exceptions for higher quality or branded content, as the CEO from iWin discussed with their Family Feud product.  However, the fact remains that a large supply of relatively undifferentiated content tends to lead to price decreases, especially as the off-shore development options kick in - one attendee thought he could produce competitive games for $10,000 in Eastern Europe and he's willing to accept much lower prices to break into the market place since he has a lower cost structure.

So with all of these trends, why do I believe so strongly in this sector?  Stay tuned for the next entry

It became clear to me last month that I'm getting a little old in the tooth for some of the more popular parts of youth culture, whether I read Harry Potter or not.  I was wandering through some online T-Shirt shops to see what's popular, and I kept seeing "Vote for Pedro" as one of the top t-shirts, which was mystifying to me unless Pedro Martinez has become that big in New York.   Then we head out to the Giants game one afternoon, and they are pushing Vote for Pedro as well on the big screen (in their case it's Pedro Feliz) and one of our guys says, "I think it's related to that Napoleon Dynamite movie, but I'm not sure". 

And sure enough, a movie which practically disappeared at the box office has become a big enough cult favorite that a t-shirt from the movie is a huge seller, and the current hot teen clothing retailer, Hot Topic, has nailed a licensing deal for it.  So I not only Netflixed that movie, but also Team America, Garden State, Dodgeball, and Harold & Kumar go to White Castle - they are all funny in their own way, and I can finally pretend to at least understand some of the reference points from today's teens, since it's almost impossible to work in digital media without that knowledge

I'll continue to hammer home this point - Casual Games are the game category to focus on from an investment perspective - not mobile, not PC, not massively multiplayer and not console.  Anyone looking for a good overview of the industry should check out the recent free IGDA White Paper

Just found out there is a firmware update for my relatively new Verizon Treo 650.  Well, after almost 45 minutes, and a lot of agony, I've been able to upgrade it.  They simply have to make it easier to do this - no consumer who doesn't work in the tech business will ever update their firmware unless it's as easy as Apple makes it with iTunes/iPod updater - will any manufacturer honestly admit what percentage of their purchasers actually takes advantage of these updates?  How many of us know it will be one of our tasks whever we visit our parents, along with cleaning off the spyware and adware from their PC's?

When we first started Donnerwood earlier this year, we licensed in an amazing game called Tringo as our first move as a new company.   Tringo had been invented by a creative New Zealand engineer in a fascinating virtual world called SecondLife - it had quickly taken over as the top activity in the world, and it was clear that the game play would work well on many platforms outside of SecondLife.   We put together a beta flash version of Tringo which you can play on our site, and we're now finishing off publishing discussions for the product across a variety of platforms.   It's amazing that you can put together such an engrossing casual game in such short order, showing why I still think the casual game market is the most interesting one in the entire industry.  Give it a shot - game goals are almost self explanatory, but a help page is available during the sign in screen.

When we set up Donnerwood earlier this year, we bought a Dell 1600N network printer.   Since we're an all-Dell shop (plus a Mac or two), it was an easier option than mixing and matching suppliers, and we generally like Dell's prices and service.   But this printer is simply not ready for prime time - is a pain to set up and needs constant sys admin help to clear almost incomprehnsible errors which block everyone's print jobs - might be fine for a larger company, but not for us.  We needed a color printer for our upcoming launch presentations, so we bought a Samsung based on the reviews, and have been really happy with it so far

I sit on the board of a company called Three Rings, which publishes a brilliant casual multi-player game called Puzzle Pirates.  If you haven't checked it out, you are missing out on a truly addictive experience, especially since the essence of the game is about community, not about raw technology .   A sample character portrait is attached to give you an idea of the flavor.  Look for more exciting developments from Daniel James and his team!

Am late to the party, but finally thought I'd try this whole blogging thing, particularly when it comes to digital media.   I can't yet comment on what we're doing at Donnerwood, but we're working hard and hope to have a service launch this Fall.   Sean Ryan, CEO Donnerwood Media.