SharkJumping

 

After a year of hard work from a great team, we launched our new Meez avatar service yesteday.  It will be in beta for a couple of months while we fix some emerging bugs, ramp up the infrastructure, and add some features, but the core premise is simple :  Meez - Your 3D I.D.

We believe that most social media, blog, and IM users will adopt a more sophisticated and fun way to represent themselves to others, and that Meez absolutely fits that need.  It's more flexible than pictures, and more expressive than text or simple emoticons.  We've seen it succeed in Asia, and just like ringtones, we'll see it become the norm here over the next couple of years.

How are we different?

1.  Ease of Use - we're web-based, not client based.  It means we can update the service on the back-end, without forcing the users to download (and keep re-downloading) client software, and it means we can address Mac/Linux users (yeah!) in addition to PC.  It took a lot of work to create a 3D, animated service on the web, but some creative work with Java has made it possible.

2.  Lots of Content - we have a ton of content available at launch, with more coming every week from our internal and off shore art teams.  Most items come with 1-24 possible colors, dramatically expanding the Personalization options.  Although the majority of the content is free, we are also launching with a set of optional premium content, both internally produced as well as licensed through great partners such as the National Hockey League and Major League Baseball, with more to come - the virtual item business is finally expanding beyond the MMOG world.

3.  A Portable and Partner-Driven Business Model - we believe that the world doesn't need yet another social media or blog site.  We're focused entirely on helping our users export their Meez to the sites and services they currently use, whether it's MySpace, LiveJournal or AIM, and soon expanding to cell phones and casual video games.  And we're committed to partnering with those types of sites to more tightly integrate the Meez concept into their worlds, just as we successfully did with Rhapsody and Comcast, Best Buy, RoadRunner, etc.  We bring a compelling, easy to use avatar service with an attached revenue model and no desire to compete with their core services - who wouldn't go for it? :)

Enough of the commercial - we're excited about the launch, and we'll learn a lot this year as this market matures from a conceptual one into an actual one, just as it has done in Korea where the avatar market is worth hundreds of million dollars a year.  Go make your Meez!  Another couple of examples are below...

 

 

On the casual game front, last week's Game Developers Conference thankfully showed the first recent hints of innovation in both business model and in gameplay.    The downloadable game growth rate has been slowing recently, primarily due to lack of innovation which is keeping the sector from attracting new purchasers.  It doesn't appear to be as severe a problem as in mobile games (Mitch Lasky's keynote speech could be roughly summarized as "I sold Jamdat, and you're all screwed"), but everyone is still seeing flat results combined with higher game costs and more competition.

So what was interesting?  WIld Tangent's introduction of a token-based payment system combined with the production of an in-game advertising SDK - it's too early to tell if it will work, and some critics will point to this effort as merely the latest business model of the ever-changing Wild Tangent, but I have to give them a lot of credit for thinking about how to attract new users into the sector - by providing a way for users to pay for casual game play in $.25 increments, and more importantly, by making it easier for large advertisers to provide these tokens to new users, it could really expand the market beyond the $20 try before you buy Wal-mart Mom crowd.  Plus the creation of the advertising SDK should make it easier for casual game publishers to monetize their free games (99% of downloads), and although I've said earlier (post) that the in-game advertising provider market is saturated, I think the casual game market is a much better target for ads.

On the gameplay side, we finally are seeing games that break out of the Match 3 ghetto, but which are still mainstream enough to sell in large numbers - there is nothing wrong with Match 3 games, and they will continue to sell to the same audience, but we need to see new gameplay options to expand the marketplace.   From my side, the hottest new innovative but popular games are:

• Mystery Case Files: Huntsville: the first compelling casual mystery game, a key literature sector for the demographic - download here, and my review here.
  
• Fish Tycoon   - Bigfish - an aquarium sim game with a lot of interactive elements as you try to discover the Mystery Fish
• - Playfirst - a surprisingly fun gardening game - have to play it to see why it's cool.

I'm sure there are more cool games in addition to those 3, and it's true they don't break new demographic barriers, but it's great to see new gameplay mechanics that have a decent chances of expanding the numbers of casual game players.  Combine this with the new advertising and token-based commerce systems, and I think the 2nd half of 2006 may see a return to higher growth rates in casual games.

Continuing the trend of following small, public digital media companies (see earlier posts on Handheld/ZVue and Digital Music Group), I stumbled across TubeMusic this week. Tube’s () concept is pretty cool, which is to provide a music video service using the emerging multicast spectrum available from local television stations as they begin to broadcast in digital form. It uses spectrum given to the stations by Congress to offer more targeted programming, and new digital televisions and cable boxes should be able to receive the broadcasts. For more information, see www.multicasting.com. Local stations are hungry for more ways to reach their user base, and this potentially offers up interactive programming opportunities for a wide range of programmers, and better yet, it may fall under the broadcast “must-carry” rule, making sure any multicast programming is also carried by cable and satellite programmers. In addition, Tube is headed up by experienced music video executive Les Garland, who was a co-founder of MTV, so the team certainly knows music video.

However, as usual in these types of reverse-merger companies, the financial structure is a complete mess (see filings), and the valuation is probably way too high at $75M, given the early stage of the company and the missteps so far. Tube’s attempt to buy and build a large music studio have turned out badly outside of what appears to be a gain on the real estate itself, and there is almost no money in the bank, plus a lawsuit and other financial defaults.

So why is it interesting? Because the company has signed distribution agreements with 3 good-sized television groups in the last couple of months, giving it a potentially compelling footprint for a launch later this year. Yes, they paid dearly in stock for those deals, we're not sure when the technology will roll out in large quantitites, and no one knows the exact deal terms.  However, we’ve seen that music video programming is a very popular format, and everyone is looking for options beyond MTV, so I think it's worth  keeping Tube on the radar to see if  they can dig themselves out  of the current hole - but still too risky to invest in them.

Video game publisher THQ somewhat stealthily launched a casual game website called Slingdot a couple of months ago.  I'm apparently member # 37,500 as of today, so they're definitely keeping it low key while they study it.  Managed out of the company's Valusoft discount software group. Slingdot is a less-developed cousin of EA's Pogo, with a nice set of community features built around about 50 simple flash games with a mild skill-based gaming element.   There is a premium subscription offering as well, but it doesn't look all that built out.   In addition to the online games, there are links to download trial versions of Valusoft's games, although the fit is often a little tenuous since Slingdot seems aimed squarely at women and children, but most of Valusoft's games seem to be aimed at men.

I have to give THQ credit for trying something different, for not over-spending on the initial process, and for running it out of a group used to lower cost structures and faster game development - it's a great way to study the marketplace, especially since it's a growing market.  I'd say the site is a little schizophrenic at the moment since it can't seem to decide whether children or mothers are the target audience.  In addition, even by online casual game standards, the games are pretty early generation Flash.  Finally, the advertising element seems a little overwhelming, with a general feeling that the ads have been dropped from a plane rather than actually integrated into the site.

However, it's another example of larger companies starting to recognize the value of this marketplace, so I can only applaud the trend.

Sony recently surprised no one by announcing that their next generation PS3 game console would be delayed 3-6 months, but would ship in early November, and that 6M units would ship by end of Q1 2007.  I am by no means a technology expert, but from my point of view, how likely does that date and those sales really seem?

1.  Dev Kits - Developers do not have final hardware, and probably won't have it until June,and it appears that the compiler, a key part of the kit, isn't ready yet.  That means developers will have about 3 months to finish off games before going gold in September to hit their November release dates.  One developer indicated that the current kits were about 2-3 versions away from final.  Prognosis:  Not Good, but Will Still Jam Some Games Out
2.  Blu-Ray - There is not currently a final production Blu-Ray drive anywhere on Earth, most probably due to final copy protection issues, but could be due to many other reasons.  Is kind of hard to fully integrate the games with a drive that doesn't exist.  Prognosis:  Not Good
3.  Cell - The new IBM/Sony Cell chip is possibly one of the most complicated microprocessors ever made, with an architecture quite different from most other chips.  Any reasonable manufacturing expert (or my six year old son) would say that it's unlikely that the output and yield of these chips would hit 1M a month any time soon.  Prognosis:  Not Good
4.  Graphics Processor - the new Nvidia processor is just arriving right now, but although extremely powerful, it's apparently not too different an architecture from other Nvidia chips, so it shouldn't be a gating factor.  Prognosis - Not a Problem
5.  Online - Sony has announced the Sony HUB, a type of Xbox Live competitor with a long list of features.  However, no developer has ever seen any code for this service (dev kits next week), and Sony has a consistently terrible record in developing online media services - e.g. does Sony Connect even still exist?  It's supposedly being developed in either Israel or in Eastern Europe, but the betting line says that initial online functionality will be more similar to the current grab-bag PS2 approach.  Prognosis - Not Good for Launch, but Shouldn't Stop it from Happening
6.  Games - As is typical for new console launches, the dev kits are late, key functionality is missing,  and it's an entirely new set of tools and architecture to learn for a developer.  This problem is compounded by the complexity of the Cell processor.  On the other hand, given the pressure involved, we know that at least some games will be shipping, even if they use only a small fraction of the console's power (see any XBox 360 launch game).  Prognosis - Very few games for launch, but Shouldn't Stop it from Happening.

Finally, in a key recent analogy, assuming Microsoft is not incompetent, they were able to manufacture only 1.5M units in the Nov/Dec time frame, and that was with a less complex console than the PS3.  Prognosis:  Not Good

Best Bet - PS3 makes it on shelf by Thanksgiving, with less than 1M units worldwide by end of 2006, and less than 3M by end of March, 2007. 

Does it matter in the long run?  Probably not since Sony has a great track record and the developers are blown away by the power of the machine, but the announced ship date and sales just aren't realistic.

Now entering the DMGI category for remarkable valuations, Handheld Entertainment (HNDH.OB) started trading today at $7 a share, and currently sports an astonishing market cap of $195M - I have to give their financial backers credit if they can sustain this run long enough to dump the shares.  I'm trying to decide if these couple of data points are the start to a full scale bubble in the IPO market, where a company can get a public investor to pay FAR more than any private investor for companies which clearly shouldn't be public.  The plan appear to be to yell "iTunes", followed by either Digital Video or Digital Music, and you too can sport a market cap of $100M+, even if you have very little revenue.

SF company this week that they have finalized their reverse merger into shell company Vika Corp.  They also announced that they have raised $7.6M in a private placement, and that they would starting trading publicly as HNDH.OB on March 6.  Handheld is the home of the ZVue portable video player, which is a $100 portable video player sold primarily at WalMart (95% of 2005 revenue), and they are attempting to follow iTunes into the video delivery marketplace as well.

With about 14M shares outstanding, the valuation for Handheld should be about $28M when it starts trading, based on the $2 price the private investors just paid.  So what do you get for $28M?  Well the good news is that you get a hell of a lot more than you do with always-amusing and stupendously overvalued Digital Music Group .   You have a company riding the YouTube and video iPod wave of Internet video content, and which offers the lowest price, secure media (including Windows DRM) video hardware in the industry.  Executive compensation is somewhat reasonable, although the most recent $.37 option grants may seem a little low to the IRS, given the 409A regulations just put into force.

The bad news is that you now have a small public company with $1.2M revenue run rate (25x sales valuation), a negative 10% gross margin (see earlier post on bad gross margin companies), a massive customer concentration, and potentially higher than industry average customer returns, at least according to its own documents.  It is also counting a lot on expanding its business model by trying to move deeper into the higher margin video services business - the primary issue is that Apple is the only hardware company which has shown an ability to create compelling software, services and revenue.  Sony is a typical example of a total disaster in those areas - has anyone seen Sony Connect or even a good PSP game in the last 12 months?  Maybe they can be on next season's Lost story arc.

The second issue is that we have one of the frothiest venture markets in the last few years, with hardware/services company Sling Media raising $46M in financing, but Handheld had only $38,747 in cash at the end of Q3, and apparently thought that the somewhat less than respected  "back door" (Wikipedia definition here) IPO was the best way to raise money - another example of avoiding the "smart" VC money by going with the "dumb" public money, as we often see in bubbles.

So why should any non-VC invest in this company?  Well, they shouldn't.  Small unprofitable companies generally shouldn't be public - the costs of being public (Sarbanes alone) rarely make the move worthwhile, especially since few stock analysts will cover anything of this size.  This makes this purely an arbitrage play like Digital Music Group, gambling that the company can raise money at a higher valuation in the public markets than private.  Even if correct in the short term for the company, it's rarely a good move for the general public investor since the risk profile is way too high - the company may do fine, but it should be private until it shows greater results.

Having been through a similar and ultimately fruitless exercise three years ago, I don't think music labels exactly quiver at the announced DOJ investigation of their digital music pricing practices.  They generally just have their lobbyists back up the bank truck, dump their load, and then watch the DOJ political appointees scurry for cover as various key elected officials race to protect them

However, given that the DOJ has been shamed into it by the Spitzer investigation, it's possible they might even follow through a bit, hold some hearings, and even demand some documents before they let it whither away so that they can focus on new ways to wiretap citizens or how to track down every Google pornography searcher.  As discussed before in this post, I believe the more interesting overall discussion is the one concerning Most Favored Nations clauses (Wikipedia definition here), and not the one around overall pricing since the MFN clause negates the need for any pricing collusion, which even I can figure out without going to law school.