SharkJumping

As was amazingly predictable (here and here), "son of Gizmondo" mobile company Xero Mobile (XRMB.PK) that the the LA office of the SEC has begun conducting an informal inquiry into aspects of the company's business.  The stock has dropped to $.20 a share from the original $1 reverse-merger price, on its way to what I can only assume will be inevitable bankruptcy.   This is only a concern for those few who actually foolishly bought the stock in the first place, but it's good to see it at least happening quickly this time.

As another update of earlier posts, the Xero Mobile - Son of Gizmondo (XRMB.PK) post created one of the most amusing set of flaming comments I have seen, which shows no signs of slowing down.  The stock is currently down 25% from its initial reverse-merger price, but isn't really worth following since there is so little trading that it spikes up and down on a daily basis, probably not helped by Gizmondo investigative articles like this one from the Times Online.  Xero's latest corporate press release hyped that fact that users could get free air time in return for recycling their old phones - looks like their stated goal of $1.8B in revenues in 3 years is just around the corner...

The flaming death spiral of mobile game console company has been profiled in many places, including in this blog, but apparently not even the recent soap opera-worthy Ferrari crash saga (great SF Chronicle article here) is enough to keep these "enterprising" executives down.  Yes, the children of Gizmondo have already returned, and are up to their old Reverse-Merger tricks, last week going public by reversing a "company" into a public shell called Desi Tv to create a new mobile advertising firm called Xero Mobile, trading under . 

The general concept is to offer free mobile minutes to users who listen to ads, a concept quite similar to the Smart Adds unit of Gizmondo, which one of the Xero executives used to directly operate.  The Financial Times has an (subscription only) with some truly ridiculous claims in it (will take only $100M in investment to create $1.8B in revenue in 3 years), but there are no public SEC filings yet, so it's hard to understand what the overall plan theoretically is.  I was slow on this one and it has been given a pretty thorough take down by a variety of other blogs such as Om Malik and Moco News, but I have no doubts that it will provide enough humor for all of us this year.

As projected in previous posts here, Gizmondo Europe for bankruptcy on Friday to try to restructure its finances - its Swedish subsidiary is expected to follow, but the US one will supposedly not declare ch 11 as well.  The company (TGTL.PK) has recently attempted to reduce costs by laying off staff, it tried to restructure its debt (held by former executives) by putting up the company's advertising assets as collateral, and it announced additional financing ($5M line of credit convertible at $.50/share).  There is talk of some private equity fund in Switzerland willing to invest $50M, but it's hard to see that as a credible option given the situation here.

Just unfortunate it was always so hard to sell the stock short, but it's still amazing that the stock was at $32 a year ago with such an obvious set of problems.

I started blogging in late July of 2005, primarily to understand the blogging phenomenon, especially after my wife consulted for blogging pioneer SixApart, and after I attended the Casual Games Conference in Seattle.  In that time, I have attempted to focus primarly on digital media, gaming, consumer technology, and a few other topics in hopefully related areas.  So let's do a very brief year-end summary:

• Infinium Labs - home of the aptly named Phantom console - blogged about them here and here.  In the last 6 months, the stock has dropped essentially to $.02, they've replaced the CEO, and it's clear it's going to Zero...
• - blogged about them here and here - my personal favorite, whose PR hack repeatedly emailed me asking "if I was part of the conspiracy against them".  Stock has dropped to 2.5 from 10 since my October post .  It's going to Zero...
• Loudeye - a good group of employees in a bad business.   Stock has dropped to $.41 from $.80 since I blogged about them in August - will be sold for less than that at the end of the day - a victim of bad sector economics and a horrible Overpeer acquisition which they shut down last month.
• Digital Music Market and Competitors - Apple continues to utterly dominate the category, with Real, Napster and others bringing up the rear.  Good news is that 75% market share brings incredible economies of scale to Apple in the player hardware business - Bad news is that the music labels still own the download category, and utterly control the economics.  RealNetworks and Napster will fight it out in the subscription business until Apple enters it in 2006, and all competitors will focus on the new web/ad-supported sector.
• Ringtones/Dwango, etc. - An amazing global $5B+ business which outlasts the perpetual naysayers, and which delivers returns increasingly to music labels and to carriers vs the earlier outsized returns to aggregators such as Infospace, Moderati and Zingy, all of whose business models are starting to resemble the market dynamics of Sysco (that's the largest US food distributor, not the router company)
• Casual Games - an unsung, but quickly growing entertainment category which is about to be hit by standard consolidation economics, with many current players being bought or going away, with the others being relegated to "lifestyle" businesses.  However, I believe the growth opportunities of this sector make it the most promising one of the entertainment category.  The reason I invested into Puzzle Pirates is because I believe they are a key break-out player in the category.
• Next Gen Consoles - XBox 360 looks like a good box with a potentially phenomenal online business, but not a great software business since the initial games are weak.  PS3 won't ship until Q4 2006, but will have great games and mediocre online support.  Who knows what Nintendo Revolution will do, but their amazing success in Japan with non-standard games for the DS is a potential indicator.
• Consumer Bubble 2.0 - yes, it's arriving, meaning valutions are increasing for these companies, but it doesn't mean they're all over-valued, just that there is too much investment cash in the category - these new entertainment firms will redefine what is currently a traditional linear media company.  E.g. if you're a newspaper company, what are you doing now as your current business inevitably declines?
• Donnerwood Media - we will launch a kick-ass new entertainment category in Q1 2006

Thanks for reading Sharkjumping this year - 2006 is looking like a very fun year....

Sean

To no ones surprise, Nokia the death of the N-Gage mobile game platform this week.  In spite of repeated denials about its impending demise over the past couple of years, Nokia decided to focus on music and camera-focused phones, while attempting to integrate better game technology into their advanced Series 60 phones vs having specific game-focused phones. 

The company spent an estimated $1B+ on the effort and sold about 2M units, which was way below their goal - it was marked by a misguided initial product (remember sidetalking?) effort which violated practically every known rule about how to launch a console, mostly becuase Nokia didn't employ anyone with previous console experience.  By the time the much improved NGage QD shipped, with better pricing, unique content and an improved feature set, the market had already moved on to either simpler games in standard mobile phones, or more compelling games in handheld platforms such as GBA and PSP.  It's unfortunate since Nokia gave it a valiant effort, producing some of the most interesting mobile online content in gaming () as well as groundbreaking games such as Mile High Pinball and .  However, as I have repeatedly mentioned, the console business is a graveyard full of broken dreams with a seemingly never ending flow of new entrants, the latest being Korean player Gamepark with their  

About the only winner in these types of platform failures seems to be Electronic Arts - Nokia was rumored to have paid millions of dollars (as high as $15M) to EA to incent them to port their sports games to N-Gage.  Given that Gizmondo revealed in their public filings that they commited to pay (they'll never pay it all) EA $6M for similar rights, I'd say EA still comes out ahead in these situations.

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 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.