SharkJumping

Not to beat this topic to death, but our superstar Marketing Associate Mayka pointed out to me today that in Halo 3, when 2 soldiers jump onto one of the tanks, one of them yells "Ghost Ride the Whip!", so it appears that this expression has completely crossed the chasm...

We launched phase 1 of our Meez Casual Game channel last night - you can see it here.   The first set of games come from well known casual publishers as well as from top flash developers, and they all trigger different emotions in your Meez as you play them - we're bringing identity and emotions to casual games.  Now wait until you see what we do next...

Too late for April Fools, small cap, so-called research firm Red Chip analyst Jim Altenbach has released a very funny research report on my favorite Christian game company, .  The finance firm is preparing for its May 29th SF investor conference.  This report is freely available from Red Chip's site here, but the humor runs far and wide, especially since it follows up on the initial Dec 1, 2006 coverage report (only 4.5 months ago), so there is an easy comparison between the two reports.

On December 1, 2006, "after meeting with corporate management, including the CEO", Red Chip initiated coverage of LFBG, projecting a $2M profit for calendar 2006 Q4 quarter ending literally 30 days later and giving it a STRONG BUY rating.  So what happened in those 30 days?  Well, LFBG ended up reporting a loss of $4.125M for the quarter.   At least there should be no SEC worry that Red Chip somehow got insider information :)

Now that it's 4 months later, what does the new April 19th report indicate?  To no one's surprise, after watching LFBG's stock plunge to $.21 from the $4.00 in December (and far lower than the projected mid-2008 $15 price), Red Chip has decided that LFBG is undervalued.  This is especially fun since Red Chip is still projecting the company to be profitable in fiscal year 2008 (3/31/08), for reasons no one can really understand based on the numbers or even a remote understanding of the video game sector. 

Red Chip currently projects that Left Behind will show revenue of $4.45M for the year ending 3/07, with a loss of $18M.  That compares to an actual revenue number of $1.01M for the 9 months ending 12/06 and loss of $21.6M, so it projects a revenue rate of $3.44M for Q1 2007, usually a significant down quarter for software publishers since it's post-holiday season, and that LFBG will show a $750K PROFIT for the quarter (I can't figure out what Red Chip did with the other $3M in losses for the year). 

One would assume that this projection is a pretty safe bet since the fiscal quarter ended 19 days AFTER the report was issued, and the research firm should be able to roughly establish the LFBG unit sell-through for the company through standard research techniques such as retailer calls and research analysis.  However, I can't imagine any possible scenario that would give LFBG a revenue number even remotely close to $3.44M for Q1 2007, but this is probably why I'm not an equity analyst.

There is also the small detail that LFBG had $73K in cash at 12/31/06, had a working capital deficit of $987K, had a "going concern" issue from the auditors, and was burning cash like wild - "Red Chip finds this to be a challenge".  But apparently, "most academics and practitioners would agree that financial distress can be fixed by capital restructuring, or if the firm can just squeak by to profitability, it can prosper."  It's like reading Sun Tzu - you can't imagine the wisdom in those words...The new rating is a Speculative Buy, with a 2-3 year target price of $2.60.

So what happens now?  As CFO Shrakes apparently indicates to Red Chip (and I agree), LFBG is probably going to raise additional funds at the current very low (and dilutive) price since it still holds a valuable asset - the game license to immensely popular literary series Left Behind Games.  But this company continues to be an utter disaster at so many levels that investors should just flee this stock and pray for forgiveness.  Or they can find comfort by reading the blog by Red Chip CEO Dave Gentry, who engages in some of the more amusing Middle East political analysis that I have seen in a long time - see here

In honor of Easter, I decided to take another look at Left Behind Games (small public video game publisher with license to extremely popular fiction series "Left Behind") to see if it was still suffering on the cross or whether it would be rising from the dead.  I originally blogged about LBG in October, 2006 (here) when the stock was at an amazing $7 (), and I pointed out that it was stupidly overvalued based on any reasonable metric.

So what has happened in the meantime?  Well, the stock is now at $.31 (yes, that's cents, as in slightly more than a quarter), giving the company a valuation of roughly $8M, but it's recently been as low as $.18 per share.  The company did $1M in Q4 2006 as their flagship game product hit the shelves, but the company lost $4M+, giving it almost no cash reserves in Q1, 2007.   The game has received mostly mediocre reviews, although I thought it was a reasonable effort, and LBG is pretty much Dead On Arrival at this point.

So what went wrong?  Well, you have an incredibly strong license here - I love the Left Behind Intellectual Property  - it has tens of millions of books sold, a great fan base, loyal authors, and a rich set of characters that one could mine forever to create rich video games.  There are numerous ways one could leverage this brand into multiple video game revenue streams, but their initial game was not one of the obvious first steps.

So what does this management team do with such a strong license?  They reverse the company into a shell company to get it public (1st bad move - you couldn't get funding with this license?), then spend an amazing $20M+ on building the first complex RTS game (2nd bad move - do they even know how to build games?), and then, by the way, on the side, they try to build a Christian social media site (www.dreamwebspace.com - this would be the first time anyone has ever mentioned this site)  while seemingly forgetting the core shareholder premise - let's build a video game franchise around a huge literary gem.

Without ever meeting the executive team, you have to conclude that there is an incredible lack of competence here.  The license rocks - how does one blow that amount of money on producing such a mediocre game while apparently spending more time pumping out press releases than actually doing QA on the game?  There were an amazing 8 press releases in December alone, including such gems as "Tyndale House Publisher Supports Left Behind Games", or my favorite from January, "Left Behind Games Receives First Order from Australia" (must be a huge market - can't wait for the New Zealand or Singapore press release)

The company is dead, and it's too early in March to see if resurrection will take place.  It's a huge bummer because the license deserves a strong development and publishing partner.  I hope Tyndale actually looks for competence next time they choose a video game licensee.

Left Behind Games is a small video game publisher () which went public in a reverse merger in February, 2006.  It has one asset, the exclusive license to the massively popular, Christian-themed, Left Behind book series, and its initial PC game will ship November 7.  So how would one value a start-up company with a possibly strong license, $12M in negative shareholder equity and no track record of delivering top-selling product?

Apparently, the public markets should value a company like this at an astonishing $128M!  That truly takes a holy man to understand, especially the 20% rise in the stock today.  Let's pretend the game sells 100K units or even 200K, which would constitute a good hit - that would give it $2.5-5M in revenue for 2007, valuing it at 25X Revenue, or 6 times higher than any other public game company.  Even more amusing is that the company just sold 3.8M shares in a private offering for $1.50 a share, yet the stock is now at $7.21, 2 weeks after it closed the offering.  And I forgot - there has never been a successful religious-themed video game.

So unless you consider this to be a donation, I would avoid this stock like the plague at current valuations.  It's possible Left Behind creates a monstrous hit like Mel Gibson did with the movie Passion of Christ, but it's about as likely as hitting the lottery at this price.

As I predicted on March 23 in this post, Sony announced this week that they were cutting their 2006 PS3 sales and production numbers, thus pummeling their stock (see IHT article here).  In addition, they will now not launch the PS3 in Europe until Q2 2007 rather than attempting to carry out a simultaneous global release as they had previously stated.  Sony is holding to its 6M projection by end of Q1 2007, but it's hard to see why that's a credible statement at this point.

None of this is a surprise - there is simply no way to design and manufacture a system this complex in the time frames they were discussing.  This is especially true when Sony is in the midst of a massive laptop battery recall, which makes the emphasis on quality even more important.  Given that Microsoft is increasing its XBox 360 sales projections, and that Nintendo remains firmly committed to its November launch date in volume, the situation at Sony is getting increasingly difficult.  As one can see from the PSP, Sony can still make gorgeous hardware, but the higher price, lack of quality software and the inability to create a compelling online experience is hurting sales vs the Nintendo DS - it looks like PS3 might be heading down the same path.

MTV Networks/Viacom announced (see ) this week that they were acquiring (home of Shockwave.com, Atom Films and Addicting Clips/Games) for approximately $200M.  I want to be clear that I'm biased about Atom since CEO Mika Salmi is a friend, as are some of the other executives, but this is a simply great move by MTV, and it appears to be a fair price by both sides.

With Atom, MTV gets a great creative team, a select group of popular sites in games and video with 20M+ monthly unique visitors to plug into MTV's strong advertising team, and  another source of content for the rest of MTV Networks.  I have to tip my hat to the executives and investors of Atom who persevered for the last 7 years through the bubble mayhem, the downturn carnage, and now the steady upswing in their properties, with the end financial result being quite positive for all involved - plus it's yet another great outcome for a RealNetworks alum, as so many of us are.  I love casual games, and I think this purchase vaults MTV Networks right into a strong position in this rapidly growing category, and the Atom/Addicting video assets are a strong fit for both iFilm and for MTV's more mature video properties as a "farm team" or modern A&R team to find upcoming talent.

Great move for MTV Networks, and kudos to the Atom team for sticking it out through the grim times.  I think this move is being underestimated by the market for how much it will bring to the company.

As detailed here, Minnesota today had its proposed law against sales of violent video games to minors thrown out by a state judge who, shock of all shocks, ruled it was unconstitutional.  This joins a long line of decisions against similar laws in states such as Illinois, California, Michigan and others.  I understand that it's an election cycle for the House and Senate, and that presidential contenders are already jockeying for position for 2008 on supposedly moral issues like this one (see Family Entertainment Protection Act post here), but this waste of taxpayer money and politician time is starting to get about as tiresome as debating constitutional amendments against flag burning. 

Violent video games are no different than violent movies - they have a voluntary industry-rating system which probably works as well as the movie one does, keeping most underage children from consuming inappropriate content.  As a parent of young children, I would definitely not like them to consume M rated games until they are old enough to understand the situation, but I also can't imagine why games should be singled out above movies, and apparently neither do judges in most states.

Following the ABC/"Millionaire" textbook example of how to over-extend a premium brand, Rockstar Games & Take2 Interactive today that they will be launching Grand Theft Auto: Liberty City Stories for the PS2 on June 6 for the bargain bin price of $19.99.  For those needing a score card, Take 2 introduced Liberty City Stories as a very good PSP title in late 2005, but it was essentially a PSP version of their earlier Grand Theft Auto 3 - now it looks like they're taking the same code and releasing it on PS2, just to grind the last dollar out of the franchise.  If they're introducing new games (albeit, recycled) at the $20 price point for the PS2, then my guess is that almost all games will be at that price point by this Summer, which may not be the worst thing for this part of the console cycle.

Some would argue that a premium brand like GTA should really be nurtured and only line-extended when it's truly worth it, such as delivering a top game for a console launch rather than re-packaging the code for every possible price and platform but apparently that's not the plan at Take 2.  At least they have the simply amazing Elder Scrolls 4 Oblivion XBox 360/PC game to take up the slack.

I have been working my way through Games' Age of Kings DS over the past couple of months.  It's a turn-based DS version of the successful Age of Empires series on the PC, and it's a pretty good game, except for the fact that Majesco apparently forgot to do any QA on the product, making it impossible for me to finish since the game has frozen up 3 times in the last campaign scenario.  It's bad enough that it has bugs in the middle of the game, but at least I could generally get around them enough to finish each battle, but I've now given up in absolute frustration.   Do NOT buy this game unless you feel the need to throw your DS against the wall.  Hopefully, our Tringo GBA game (published by Crave Entertainment) will be a better experience next week when it hits stores on April 24th.

So why is this a problem?  Companies release beta products all the time, including Google News and our own Meez, as they work through bugs and performance issues.  The key problem here is that Age of Kings is not free and isn't labeled BETA, as other Internet products are.  In addition, unlike the other services, there is no way to update a non-WiFi enabled DS game, except by having it replaced, which is clearly not going to happen even though this is a well known problem on Majesco's .  Finally, Majesco (COOL ticker)has been an absolute catastrophe since going public in a back-door reverse merger, going from a split-adjusted $35 two years ago to today's $1.40, and it's now trying to refocus back on portable console games, but this is only going to work if they actually do some QA on them before releasing them...

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.

It's nice to see that a European liqudation and a US bankruptcy can't keep perennial Sharkjumping whipping boy (see stories here and here) Gizmondo out of the press.  In a "only could happen in LA" story, disgraced former Gizmondo executive Stefan Eriksson apparently smashed his million-dollar Ferrari Enzo (only 400 made) into a power pole at over 120MPH while allegedly racing another car, and then of course, fled the scene, as any supposed former Swedish Mafia member must be taught to do - more here from LA Times (registration required). 

It's hard to track the Carrington-like cast of characters at Gizmondo, but Erickson was the one who resigned from Gizmondo after is was revealed that he had been convicted on a number of financially-related criminal charges in Sweden - I guess the Ferrari was where he put his $100,000 annual car allowance - see Gamesindustry.net story here. 

Now that Infinium Labs has decided to make keyboards rather than video game consoles, we're running out of humor in the console business.  Maybe we can start a web site speculating which day Sony will actually ship the PS3 - given how wide the range of possible options are, we could probably sell over 500 pixels on it.

Similar to the podcast advertising rage, one wonders if the video game business can realistically support the amount of venture capital pouring into "in-game" advertising companies.   One of the press releases indicated that in-game advertising is poised to grow to more than $1B before 2010 while another said it will be $2B+ by 2008, although I can't find the exact research except from DFC Intelligence saying it will be $500M+ by 2009.   

There is no question that consumers, especially the always desirable young male demographic, spend ever increasing amounts of time in front of video games, some of which will be web-connected ad environments (the majority of PC's today, and I would think maybe 25% of consoles in 3 years).  Although there is an amazing tolerance for advertising where it's not too intrusive, it's hard to see how much of it will make sense in any video game where there is a specific story and environment involved, e.g. in a wild west game or in Halo, how many advertisers could plausibly insert ads, meaning how many Pepsi machines do we really think were around in the 1840's, or in the science fiction future?   And who is going to stop to click on the ad, meaning it's more product placement than advertising, which makes it a much smaller market.

On the other hand, it should work quite well in modern games such as Grand Theft Auto and most sports games, where EA has traditionally had product placement and advertising opportunities.  And it's true that most game publishers are desperate to find additional revenue sources as development costs explode upwards, especially if the hoped-for $60 price point doesn't hold for next generation console titles.

So assuming that the market will actually develop, let's tally the players in this small but potentially lucrative market:
1.  Massive - the grand daddy of game ad networks, I'm told it's raising money at a $200M+ market valuation.  Has raised at least $17M in the first 3 rounds, and has a series of video game partnerships.  It's apparently up and running although I've never seen an actual advertisement in a game.
2.  - announced a $12M A round of financing today.  Has a proprietary in-game advertising technology called Radial.  Has not announced any partnerships.  Cleverly owns the URL InGameAdvertising.com
3.  - hired Geoff Graber, formerly of Yahoo Games, and announced a $10M A round 11/05 led by Accel, and moved the company to SF from Israel.  Has announced no partnerships.
4.  There is at least one more currently recently funded in-game ad shop which has not announced its funding yet.

Plus there are players like Shockwave.com who have plans to do in-game advertising themselves across their large casual game network, and probably more that I don't know about.

So we have at least 4 well-funded independent in-game advertising providers, plus some who will do it themselves.  The key question is what should an ad serving and selling network be worth?  It should be some small percentage of the overall advertising market since the vast majority of the value goes to the site or game which is delivering the user.  If the in-game ad market is theoretically worth $1B by 2010 (in 4 years), than it's reasonable to assume that the folks who deliver the ads are worth maybe 20% of that number, assuming a competitive marketplace.  Therefore, you have the total market value at $200M at most, which doesn't jibe well with the series of announcements so far. 

I would assume one will see Massive continue to lead in the console space, while the others focus efforts on sectors such as casual (probably the best place for advertising due to slower game pace, fewer story line issues, and lots of game breaks), mobile, and handheld, but there is already a crowded marketplace on the supplier side.

We were setting up the XBox 360 at the new office this weekend (will post later on the significant pain involved in linking it to Media Center) and I remembered that the new Full Auto demo had been posted to XBox Live Marketplace.  Within 15 minutes we had downloaded the 650MB file to the XBox and there was immediately a lot of yelling going on since the game is a huge amount of fun to play!  Based on the demo, it's definitely on our purchase list for Feb 15 when the full game ships - see Sega description

So why is this important - PC users have been downloading PC demos for a long time, and even Xbox or PS2 users could get demos off of disks distributed through magazines and other outlets.  The Full Auto experience was important because it was SO EASY.   The XBox Marketplace makes it comparatively simple to download movie trailers, game demos, and eventually, a host of game add-ons, new levels, etc. (although it doesn't allow you to do anything else while downloading files - see earlier post)  This functionality has been discussed for years, but has been too hard to implement in consoles without broadband functionality, hard drives and a robust online interface - today's simple great game demo download pointed the way for me on Xbox since the initial content I reviewed in late November wasn't very compelling, outside of a couple of fun Live Arcade games.

The general consensus is that Sony is not as committed to online functionality as Microsoft is, and may not even have a built-in hard drive in order to reduce costs stemming from the choice to include a Blu Ray drive and more powerful processor.  I'm not sure Sony needs to have as robust a system as Xbox Live, but to ship PS3 without a reasonable online game matching system, basic community functionality and the ability to download extra game content would be a serious error.  This current generation of console users is accustomed to the benefits of online communication and file transfers - simply having a faster processor and cool DVD won't be enough over the course of a console cycle.  And as we've seen with Kart Racer in Korea and host of other RMT (as detailed here in Wikipedia) games in Asia, the potential revenue from selling add-on items is going to be quite large, at least in Asia and probably around the world.