SharkJumping

Blogging will become a little more erratic going forward since we're beginning our B Round fundraising process.  We have a team I would put up against anyone, an alpha version of what will soon be a great entertainment service, and a healthy fundraising environment for consumer-facing companies, so I'm excited about our options, but now it's our job to convince the investors of the same things.

Wireless measurement firm recently that 30% of mobile games provided 80% of the industry revenue in their latest study.  It's not a huge surprise due to the problems in marketing a large set of games on a mobile deck, so people naturally gravitate to games they know or which can be described in one sentence.  Nor was it a suprise that recently acquired Tetris was the top game - otherwise, $137M would have been a lot to pay for it.

However, the first surprise is that 9 of the top 10 games were of the general casual variety, either Puzzle, Card or Trivia - so no sports or shooters, and only one fantasy game.  The second and bigger surprise is that the #4 and #5 games were both mobile versions of PC casual games, in this case PopCap's Bejeweled and PopCap's Zuma.  So in spite of all of the talk about how big brands matter most in mobile, and how there are supposedly no brands in casual games, 2 of the top 5 games in all mobile gaming are from the PC casual game world - looks like there are multiple ways to build brands, and that there are multiple distribution channels for successful casual games.

In what has become somewhat of an annual ritual in the digital music business, the music labels are again complaining about the $.99 price point for tracks on Apple's iTunes digital music service (the other download services aren't big enough to matter and would have to follow whatever Apple does)- good NYT article about it here.  Having lived through this discussion more times than I would like to remember, my first thought was that I was glad not to have to go through it again, but let's look at the primary issue.

The core disagreement is that labels feel that flat rate pricing doesn't capture enough margin for those hot tracks where users would pay more.   Numerous studies will be trotted out, showing that consumers will pay up to $2-3 for hot singles, so the labels are giving up substantial margin by wholesaling all tracks at $.70-75.   Then they will point to ring tones where pricing is 2-3x higher, and that's not even for the whole track or even the song itself in case of polyphonic ringtones.  Finally they will offer up a lower price point which will be added to the equation so that it doesn't look just like a price increase - the goal is probably a $.50-$.75 price point for deep catalog/less desirable tracks, $.99 for the majority of music, and $1.49-$1.99 for more popular tracks, the overall algorithm to be determined in some TBD way.

It's an interesting point - in most markets you see differential pricing along the life cycle of the product - e.g.  a movie starts at $9 in a theater and then goes down the price curve (VOD, DVD, Pay Cable, etc.) until it reaches free in the broadcast market.  Video game consoles are introduced at $300+ price points, and gradually move down to a $99 price point towards the end of the 7 year cycle.  And everyone should be incented to generate additional margin, so why shouldn't the service providers go right along with this theory?

The reason is that most service providers I know (including Listen.com before our purchase by Real) have done their own price elasticity studies which show that digital download purchases are utterly price elastic when measured over a period of time across a large group of consumers - that means that demand for the product is closely related to the price - increasing the price will actually drive down revenue since fewer people purchase the product, while decreasing the price actually increases the overall revenue since many more people purchase the product, more than making up for the lower price per unit. 

I have no doubt that if you picked one hot track, and polled users in isolation to ask them if they would pay more than $.99 for that track, many would tell you yes.  But the studies show that when you measure behavior across a longer period of time, everyone is better off with lower prices for music downloads, with $.50 being actually the magic number, especially for a business which has NO hard cost of goods outside of artist royalties, which are almost never on a fixed basis so they will decrease with the price.  The explosive growth of DVD sales are a classic example of this - DVDs used to cost $90+ and very few were sold outside of rental stores.   Once the price dropped to the $20 range, the number of retail outlets exploded, consumer demand sky rocketed, and DVD sales became the most profitable part of movie studios.

Admittedly, there are other parts to this discussion, such as the operational difficulty of frequently changing prices (one label actually once proposed changing it on a weekly basis according to how many radio spins the track had recorded the previous week - no joke), the confusion in the market place with multiple price points, the seeming amnesia about the continuing massive piracy issue, the bitterness the labels feel about Apple's iPod profits and growing digital market power, channel conflict pricing issues with physical retail,  label concern about "lowering the value of music", label unhappiness that the publishers statutory rate would not go down with the price decrease, etc - but it really comes down to one point - is digital music price elastic and if so, by how much? 

Financially troubled video game company on Friday that it sold its kids-oriented Humongous game studio assets to parent company Infogrames Entertainment, which is a separately traded French company.  The price was approximately $10.3M, paid in newly issued Infogrames shares.

Given the fact that Infogrames owns 52% of Atari, and has the same Chairman, It must strike at least someone as strange that there were no other bidders willing to pay more than 1x revenue for a brand with historically great assets and apparently historic profitability up through 2003.  We are currently in a frothy private equity environment where there are multiple bids for video game companies such as Eidos and where classic entertaiment assets can be profitably exploited across multiple distribution platforms, but no one bid $1 more than the parent company?  Looks from the outside like Infogrames got a great deal.

I Googled myself last night and discovered to my surprise that AOL Music has apparently bought my name as a key word, in addition to buying other digital music business names such as Dave Goldberg from Yahoo Music and Evan Harrison from Clear Channel.   I originally assumed there must be an artist named Sean Ryan on AOL Music, but there is nothing there except a link out to an artist on Shanachie Music through AOL's Singing Fish property - hardly enough to justify buying the key word.  So I typed in Dave and Evan's names, and there is literally nothing in AOL Music, including any outside links.  Then I assumed that they had just purchased every possible name, like eBay does sometimes.  But when I typed in a whole host of other names such as Kevin Ryan (my brother) or JP Lester (our CTO), there was no AOL Music link.  Not sure how I feel about it and there is clearly nothing wrong with doing it, so I hope it's working for them - I've been wildly clicking on it all day...:)

Garth Brooks and Walmart announced this week that his music will be available exclusively at and its various affiliates such as Sams Club, as soon as existing physical inventory at other retailers becomes exhausted.

Why is this interesting?  Garth Brooks is the top selling music artist in American history.  It's the first time that a top 5 artist has decided to sell his music exclusively through one outlet, no matter how big it is.  This is potentially going to be a bad precedent for Walmart's competitors, but one has to remember that Best Buy started this exclusivity trend, and that Walmart probably sells more than 50% of Garth's content since it has a larger market share in rural communities, so why not do it in order to differentiate their stores?  It's similar to the recently announced NFL/Sprint deal where a sub set of NFL content is available only to Sprint subscribers - it may not work for everyone, but the NFL is assuming that their brand is high enough to drive subs to Sprint if the NFL content is good enough - we'll see how the Walmart/Garth numbers work in the next year.

However, what is amazing as far as we can see is that there are still no digital rights available for Garth Brooks content on Walmart.com's music service.  So Garth gets his music rights fully from EMI, and decides to continue to sit on the digital rights?  That is where the major value will be within 5 years, and you would assume there would be a plan for that as well, but for now it looks like the Garth digital hold out will continue.

Have been busy on other things for a week, so I have been unable to post, but the fact that continues to strike me is how few really informed people know what the casual game portal Miniclip is, and more importantly, how amazingly large it actually is.  I have never personally met the team, but you're looking at a very small group of folks in the UK who have built what Alexa (poor man's measurement system) portrays as a top 200 global site, all built around around casual games.

Unlike much larger players such as RealArcade, this site offers a wide variety of games from around the world, including standard downloadable games, online java ones, MMOG's from our friends at  Puzzle Pirates and Runescape, and fun games/movies such as the infamous Bush and Britney dance sequence, all without any type of download required for the core enjoyment experience, and very little of which appears to be originated by Miniclip itself.

This is all another example of how an under-the-radar site like Miniclip can can prosper without a lot of PR since it's focused on casual games vs the larger audience of console games.  With the ongoing advertising shift in budgets to interactive media from traditional media, you will see sites such as Miniclip and pick up large amounts of ad dollars since they are delivering what advertisers lack - younger consumers.  It's not necessarily about the downloadable business, it's about the number of eyeballs you can deliver in this new world, and casual games such as Miniclip are a great vehicle.

I rarely comment on console games, but in a continuing laugh track-worthy sequence, Infinium Labs (OTCBB: IFLB), home of the amusingly and aptly named Phantom console, today announced that Kevin Bachus, one of the original Xbox executives and current Infinium President, had been promoted to CEO, and that the company was moving to Seattle from Florida -  I could go on and on about this company, but it's really too easy (recent 10Q including mention of going concern problems, content license defaults, inability to raise money, etc.) and it's impossible to short the stock anyway, so I'll leave it to a brief article about the company here. 

General consensus is that will be in a similar state soon with its mobile gaming device and an astounding current $800M market cap, but it's too early to tell for sure on that one.  However, a basic analysis over the entire life of console gaming would show that successfully launching and sustaining a console has been done by legacy players Nintendo and Sega (made it 3 generations, but is no longer in the hardware business) and by large companies Sony and Microsoft - every single other one (list is long, but includes Atari, Intellivision, Coleco, Philips, Bandai, Tapwave, etc.) has failed, including arguably, the Nokia N-Gage at a cost of more than $1B, which will presumably be discontinued as a separate hardware platform as they continue their announced transition to Series 60 content in 2006.  The idea of a smaller company or start-up successfully launching a console is just not a realistic proposition - one needs to work with the existing platforms, whether they are open ones such as a PC or phone, or more closed ones such as a console, or set top box, in order to be successful.  Therefore, do not own stock in start-up console hardware companies.

Following on the heels of a brutal Infospace a couple of weeks ago, Dwango Wireless disappointing financials today, and also announced the resignation of their CEO, Rick Hennessey - a key reason in both cases was given as the market transition to MP3 ringtones from the current polyphonic ringtones. 

This has been expected for some time, but appears to have hit the marketplace harder than some companies expected.  Unfortunately, this is a lose/lose situation since the companies without big mastertone deals (such as the RollingStone-branded service) are seeing revenue decreases, and those offering mastertone deals are seeing gross margins on those services plunge to the 7-15% range from the 40%+ range of polyphonics.  Shawn Conahan, formerly of Moviso, does a good job on his of taking a look at the specifics of this business.  However, the end result is that the ringtone gravy train is coming to an end much faster than some expected, and mobile service providers need to change how they do business, either by introducing other higher margin services, or by changing how they sell them, as Jamster has done.

I flew to NY last week on Song, Delta's "cool" sub-brand - I normally fly United, but Song was significantly cheaper and I had wanted to try out their concept, including the entertainment options.  Outside of each leg being late, the flight was just fine, but the best part of it for me was the casual game set up.  In addition to Dish TV, some on-demand movies and a pretty strong music on demand solution, there were 11 casual games available for a $5 purchase per game.  It wasn't obvious, but it looks to me like the games (and a specific multiplayer trivia game) were provided through a partnership with eFlyte, which has an almost non-functioning web site so I can't comment on it myself.  The 2 bigger brand name games were Bejeweled and Insaniquarium, but there were a host of other less known ones available to customers.

What I love about the casual game business is the idea that almost any device today can provide the game experience - could be the Sony PSP, a TV set-top box, a mobile phone, or in this case, an on-board entertainment system.  I walked up and down the aisle seeing who had purchased the casual games - I'd say it was in the low single digit percentage, but some of that was due to the lack of free play option ( a key part of the success of casual games when there are fewer brands) and some of that was probably just the nature of the business - it appeals to a certain type of user and there were a lot of other entertainment options.  In the end, it's all gravy since the core business is on the PC, but this is another great example of ways to extend success in the core business to another distribution channel - there are a lot of ways to play this game.

UK-based PC and console game company Codemasters announced this week that they will launch a casual game portal in September called Funsta.com using technology & content from RealArcade, TryMedia and Metaboli. 

It's a little surprising since the company is primarily known for its racing and sports games, has no history of being involved with casual content and would seem to bring very little built-in consumer traffic to the new brand.  On the other hand, one could see it as an example of the new management strategy since they announced that Benchmark Europe had acquired a 40% stake in the company, and that it's a sign of the expanding casual game category that console companies are now actively investing in the sector.   

Assuming they put a lot of marketing muscle behind the portal, it will be good news for developer/publishers since it will provide an additional distribution channel beyond the usual suspects.  In addition, it could be a significant partnership win for RealArcade, which has been facing a little bit of resistance to its client-based approach vs other web-based competitors.

Loudeye released their 10Q yesterday along with their Q2 financials.  Let's look at their company as a relatively decent pure play proxy for the music download business since 72% of their Q2 revenue is from the music store business - this is a vast increase from 7% in Q2 2004 since they acquired European music download service OD2 in mid 2004, transforming the company along with other small acquisitions and divestments.  The reason I chose Loudeye is that Apple and RealNeworks have substantial other businesses besides downloads, and Napster has a growing subscription business, although there is some fun to be had with that 10Q as well.  Let's focus on what I think is the consistent key metric of a music download (or actually any) business - Gross Margin - this is the difference between the revenue of the service/good, and its direct cost of providing it, before other costs such as marketing and overhead.  It must be high enough and have enough volume to cover the operating costs of the business - seems basic, but often fades from view in bubble/frothy times.

So how does the music download business look?  It's pretty clear - Loudeye's overall Gross Margin for Q2 2005 was $170K, or 2% of revenue (when music store revenue was 72% of revenue), vs $1,900K or 39% of revenue in Q2 2004 (when music store revenue was 7% of revenue).  And amazingly enough, the 10Q projects that digital media margins may further decline in 2005 vs 2004 - one might ask how much lower can they go?  You could argue that the real problems are in the other 28% of the company's revenue since the 10Q makes it clear that the Content Protection/Overpeer business was a negative margin busines, but at less than 7% of overall revenue, it can't have been a huge factor unless it's a total disaster.  Plus it should have been offset by the remaining 21% of revenue, non-music store businesses such as encoding and hosting, which we can only assume are positive gross margin since they are for every other company.  If we assume the Loudeye is a proxy, then the basic conclusion is that the download business is actually close to a zero margin business for service providers, at least at volumes below Apple.

This post is not meant to focus specifically on Loudeye's issues since I believe the management team is trying to transform a company with a mixed bag of assets into a potentially valuable pure play in digital music, especially in mobile music through a significant Nokia relationship, and that takes time and effort.   But as we have discussed before,(and which is laid out in various Risks of the Loudeye 10Q), the digital music download business is, in particular, NOT a place for service providers, or in my opinion, for investors.  The margins are simply terrible, one has no leverage over your primary suppliers, there are legions of competitors, your business customers want to go directly to the labels, and there is a massive piracy issue.  If you want to masochistically be in the music provider business, there are potentially areas such as Internet radio, general subscription services,  ringtones, music  videos, independent  music  sites, etc. which MAY  provide a way to make a postive gross margin for a period of time - but if they exist, I haven't found it yet, at least not on a sustainable level.

If anyone is looking for innovation in the game business, some of the smallest developers have some of the coolest games, even on very limited budgets.  Smallball is an under-the-radar sports simulation operated by Ed Annuziata, a well known console developer (Ecco the Dolphin, Tiny Tanks, etc.) who used to work at Sega while I was there.  In this game, you have a tiny team (thus the term Small) of baseball players which you create and actually train in order to improve them.  Then you throw them into a game against a rival, but it's a simulation, vs an arcade game where you actually control the action.   The seasons are about 2 weeks long and it has a small, but dedicated following around the world.   The user interface is still too complex, and it doesn't have the polish of larger budget games, but it is a huge amount of fun for baseball fans.  The basic game play is free, with the revenue model being a virtual item one where you can buy upgrades for the team, such as converting  your right hander to a left hander, or hiring a trainer to help get your team in shape.   There is also a soccer version known as SmallBall Football, primarily for the European market, and there are rumors of other Smallball sports coming soon.  Check it out and tell me what you think.

Starting from an employment posting on last week, the word quickly spread that Amazon was entering the digital music business, with 120+ articles about it now listed in Google News. My initial comment is that is must have been a slow news week, competing solely with yet another Russian sub disaster.  My general view is that, although I have a huge amount of respect for Amazon's online prowess, this is akin to Sneezy joining his fellow dwarves in the digital music forest Why do I think this "news" is not news-worthy?

1. Amazon is about the only signficant retailer without an online music play, so this is not exactly groundbreaking news if they enter the category unless one assumes that this category has now "made it" if they enter.    and Target both have their own services, while Best Buy and Dell have partnered with Napster or Music Match for integrated packages.
2. Outside of a large customer base and a well honed marketing edge, how does anyone think that Amazon is going to differentiate itself when the label licenses are essentially identical, Amazon doesn't directly make music hardware, and when Amazon is starting from scratch in the category?  Neither Walmarts $.88 pricing plan nor the $.49 Top 10 that Real runs appears to be making a difference, and there is no way to provide free shipping...
3. Looking at EMI's and Warner Music's earnings announcements, it looks like overall digital music is probably around 5-6% of their revenue, split between mobile and PC.  Adding Amazon to the PC download and subscription list is certainly not going to matter to those numbers, especially when their primary focus appears to be shifting to mobile music and music videos vs PC downloads - see Universal Music's announced into Amp'd Mobile as an example.

I think Amazon will grow the overall music business with its entry, but not dramatically enough to be worth 120+ articles, just as MTV's long awaited entry will also not be worth the noise it will generate.  It will take a signficant shift in the business, such as a move to mobile phones, to dislodge Apple from its leadership position in any reasonable time frame.  Until that happens, Snow White will be ruling the forest with an iron hand.

True Story - A friend came by this evening to discuss some new business concepts, and my initial response was that I was excited to hear what he was thinking about, as long as it did not involve a new business around inserting audio ads into podcasts.  Imagine my surprise when he, of course, indicated that it was exactly what he was proposing.  JUST STOP IT

This literally marks the 5th conversation I have had within the past 4 weeks with either an investor or an entrepreneur about entering this amazing zero billion dollar business.  Outside of the obvious hype around the overall podcast sector (or blogcast as they amusingly call it at Microsoft), let's discuss the issues involved:

1. The overwhelming leader in 3rd party Internet ad insertion, Doubleclick, just sold for approximately $500M in total enterprise value, much of which was the non-DART related division.  Who can name any other player in the sector?  So unless we assume that the podcasting ad business will be much larger than the overall Internet ad sector, or that Doubleclick was sorely undervalued, that would appear to place a ceiling on the concept, especially for any player besides the leader.  (Note - my brother Kevin was the CEO of Doubleclick until its recent sale)
2. Podcasting would appear to be subset of the Internet-connected PC business, meaning that you must have a device to connect to a PC to get a podcast.  The closest analogue in the Internet -connected PC business is Internet radio since podcasting is essentially time and space-shifted Internet radio, which according to the Edison Research/Arbitron report Internet and Multimedia 12, has a monthly audience 8x as large as satellite radio, but which has an almost ad market associated with it, almost 10 years after the sector started.  So, if it's at all related to Internet radio, or more likely, a subset of it, it's going to really small.
3. It gets worse - podcasting is not going to be legal for most mainstream music in the near term since it's clearly not covered under any statutory rates, so the overall market is limited to non-music podcasts.  As one label executive candidly put it, "we regard podcasting as file sharing in sheeps clothing".
4. Unlike advertising key words or banner ads, any podcasting ads will not have any easy way to click through or provide even basic feedback on whether they were heard or not because you listen to them offline.  Yes, one can eventually implement some type of WM10 Janus-style system where the exact listening pattern is tracked on the device and then reported back next time it syncs, but there is still the non-click through issue, and the Janus technology doesn't work all that well, and is not present in most devices at this time.  You can argue that normal radio advertising doesn't have direct feedback, but advertisers often hold Internet advertising to a higher standard because they can do so.
5. The most likely podcast advertisers are current radio advertisers, and the vast majority (85%) of that market is so being able to aggregrate enough 94114 area code (for example) podcast listeners to be able to effectively market the local car dealership to them is going to take a long time.
6. There are obvious players in the category already - Audible has announced its intentions to monetize this space, Google & Yahoo would logically extend their RSS and key word expertise to the category as might Apple as the true category leader, and there are multiple start ups which already which have indicated they want to be in the sector.

I am not anti-podcasts, as some friends of mine have indicated.  It just seems that the hype over the viability of ad insertion businesses has quickly grown excessive, even by Silicon Valley standards, so that converstions are now reaching what I used to call the Long Tail pitch - it's not a venture or entrepreneur conversation unless we all mention the Long Tail (or podcasting ad insertion) at least once - there are simply too many obvious barriers to this being a meaningful business for a start up.

As a long time fan of the Nintendo GBA series Advance Wars, I have happily been playing a similar web game called for the past couple of weeks.  I won't venture a legal opinion on how similar it is to the Nintendo IP, but it's a great example of a fun web-based game that is not a puzzle game.   It's flash-based, with either single player or multi-player options.  The computer AI is not very smart and one could always improve parts of the interface, but it's very easy to get into the game, and playing against other humans provides a real challenge.   The revenue model is free for the base gameplay, with a $5 monthly subscription package offering additional game units, special terrain and additional game maps, along with some badges and other features.  It doesn't look like it's getting a lot of gameplay, and like many small game efforts, I'm not sure how it will do as a stand alone entity, but the concept is another example of the expanding appeal of web based games, and of the multitude of revenue models possible in this field.

Because my family is away for most of the Summer, I've been looking for ways to stay in touch, especially with my young children, for whom using a phone is a little difficult and too hard to visualize who is on the other end.  I had used about 9 months ago, but found that it was not ready for prime time, especially from an interface and set-up perspective.  Since Skype video is not available yet and the other dedicated video packages all seem too expensive, I tried Sightspeed again, and I have to say that it's been worth the effort. 

Sightspeed is a Peer to Peer Video over IP service, meaning the costs to provide it are quite low, allowing it to offer very reasonable pricing.  For the free package, you get 15 minutes of video calling per day, and 10 video mails per month, with the subscription packages giving you a greater feature set - you, of course, need video cameras on both ends - we use two Logitech Quickcam for Notebooks Pro, and they seem to work well, including decent microphones.   The video mails are good if you want to leave a message if no one is home, and 15 mins per day is a perfect amount to allow you to say hi.   The quality varies, especially if you have Wi-Fi on both ends, and it took a little bit of tweaking to figure out which settings to use, but the functionality is more than adequate for a casual system.  The children love the concept and although the quality is not nearly high enough for a business situation, it's been a big win from a family perspective.  You can just imagine what it will be like in a few years as all of the underlying technology improves.  Has anyone else used other video systems?