Before the App Store, the Western game market was mostly Java games on 2G networks using slow WAP browsers.  I think it is reasonable to believe that this Western market consisted of 1 billion of these feature phones but that only 50 million were actively buying games from the carrier decks.  If we assume that those gamers spent $20 per year then the market would be $1 billion in consumer spending.  If half of that revenue share went to the game publishers it would size the pre-Apple Western mobile game business at $500 million in 2008.  But that’s only 50 cents per year per handset in the market because of the low level of customer participation.

Led by the iPhone and 3G networks, the mobile web is coming fast to the West.  AT&T and Verizon recently reported respective annual increases of 87% and 92% in the number of customers owning phones with mobile web capability.  They also reported year-over-year increases of 33% and 28% in quarterly revenue from web data traffic.  These are the first tectonic shifts from the first network with a great device and the first one with a great 3G network; the best is yet to come.

Earlier in 2009, the Apple audience reached 50 million, at which time I would estimate that the annual rate of Apple game purchases by consumers was $200 million.  At 70% revshare, the game publishers’ share of market would be $140 million.  Some will complain about lower app store pricing but in reality this market is much healthier because a lot more customers are playing games.  Let’s assume that these mobile web users are 4 times more likely to pay for games.  That would mean that 20% of this audience, or 10 million handsets, generated the $200 million in purchases.  If so, we’re right back to the $20 per year being spent by each gamer on the carrier deck.  But now there are 4 times more gamers!  And since the revshare is higher at 70%, the net revenue per handset to the game publishers is $2.80 per handset – nearly 6 times more than the 50 cent level of the carrier deck.

And this is the tip of the iceberg since handset forecasters believe that most of those 1 billion Western feature phones will become mobile web phones in the next three years.  The behavior we see on the iPhone has been seen before in Japan and Korea, and can and will become mass market.  The primary reason for this change in behavior is that with the improvements in networks, devices and apps, the web is finally *fun* on mobile devices.  And much more convenient than a desktop PC.  And everyone wants to do it.  Like they’re already doing it in Japan!

If we apply “ Apponomics” to 1 billion Western mobile web phones, the game market would be 20 times larger than it was on 50 million iPhones.  That would be $4 billion in consumer spending, but perhaps to be cautious we should trim $1 billion from this number to account for the late adopters who have tighter budgets.  Then the market in 2012 would “only” be $3 billion at retail and at 70% revshare would be $2.1 billion in publisher revenue.  That’s more than 4 times larger than our $500 million estimate for 2008, and it is only three years away.  And it’s not crazy.  Apps are catching on and will go mainstream.  Once upon a time nobody had a PC and now every desktop has one.  The mobile web will be like that.  Even if only half of this audience of 1 billion handsets buys a game, we are talking about 500 million casual gamers.  If that many people are playing they would only need to spend $6 per year to hit these forecasts.  That’s only 50 cents a month.  I think this amply proves that pricing is not going to be an issue – it will be dwarfed by the increase in viable mobile web devices and the higher degree of audience participation.  What a surprise, the mobile web will be a lot like … the web.

1.  It’s About the Mobile Web

The principles that have made the World Wide Web such a huge success have to be enabled on mobile networks and devices.  This includes innovative and healthy content supply chains, social value, viral spread, viral discovery, free trial, and having a variety of ways to monetize and bill for mobile content.  DoCoMo did this right from the beginning of mobile data in Japan in 1999 and today Japan has the highest user penetration, highest user spending on mobile data, and highest spending on mobile content.  Far more email in Japan is sent from mobile devices than from desktops.  Korea copied the key elements of this model and had similarly great results.  In the West, many phone companies ignored DoCoMo and what had been learned from their sister wireline broadband companies, where again today we have consumers spending more on data than on voice because of the web.

2.  3G is a Requirement

To really feel like the web, 3G is the baseline requirement for network performance.  It didn’t happen with 2G.

3.  Touchy Feely

Another baseline requirement appears to be the better feeling of “flow” that is provided by a touch screen.  Capacitive touch screens that rely on sensing electricity levels are ideal because they can be more, “swipey”.  This quality of user experience has obviously caught the imagination of the public.

4.  App Stores with Integrated Billing

A shopping experience like Apple’s App Store that adopts many of the DoCoMo business practices is also a requirement for both the customers and the supply chain.

5.  Virtual Economies Will Lead

For games in particular we will see a shift from games as a product to games as a service and a shift from paying for the game to free trial with paying for the stuff you need to fully enjoy the game.

6.  Offer Completion Networks

Yes, they need to be cleaned up but they are an important economic element and they need to migrate to mobile like banner ad networks have.

7.  Content Supply Chain Health

DoCoMo originally paid 91% of content fees to their content publishers and also cultivated support for the innovative and serious professional suppliers who could scale and help drive market growth.  Today, companies like Facebook and Apple are actually too laissez faire; they take the app supply chains for granted and overrate the importance of both the big companies and the long tail.

8.  A New Middle Class Must Rise

The supply of web content or App Store content can divide into 3 classes:  big companies, the long tail, and an emerging middle class of newer and smaller companies that are doing native development that is innovative and that fits the new mobile medium.  The operators of the App Stores need to actively cultivate this new middle class.  Ultimately the long tail will produce some gems and develop some amateurs into professionals.  But the long tail must be viewed more as a developmental part of the supply chain, not the key driver.  And big companies cannot define or grow a new medium (the web being Exhibit A).  To develop this middle class the App Store owners need to actively identify, help and support a handful of small companies that have the potential to scale into the future Googles and Facebooks of mobile.

9.  Social Will Go Mobile and Across Platforms

The entire concept of social media that is now dominated by desktop PCs will shift to the mobile side and cross-platform.  Why?  First, because there are only going to be 1-2 billion PCs compared to 5-6 billion mobile devices.  Second, because you especially need to be “connected” 24×7 to obtain social value and this can only come from your mobile device.  The shift already happened in Japan; in the West it is merely awaiting the rest of the needs on this list.  Finally, when you get to social media as a service in the cloud you will want to connect with friends and other people regardless of what network or device they are coming in from.  Companies that are better at covering more platforms will have an advantage.

10.  Social Networks Will Be Mobile Apps but Not Mobile Portals

Facebook is already a potent mobile app but won’t be the same kind of “destination” that they have become on the PC.  SNS will have to have a shrunken feature set to fit on the mobile side and will compete on a more level playing field with other apps that are entirely crafted with mobility in mind.

There is compelling early evidence of our enormous market potential and how these issues and opportunities are already taking shape.  Morgan Stanley analyst Mary Meeker did a great job at the recent Web 2.0 conference of organizing some of the facts and data behind these trends.  You can find her slide show at this link:

http://www.techcrunch.com/2009/10/20/mary-meeker-economy-is-recovering-mobile-is-exploding-and-the-iphone-is-awesome/

I take a balanced view of all of this.  First of all we are talking about a new industry that is having typical growing pains.  And yes, there are abuses.  One of the worst is the scams that offer something simple like a free ringtone and then ask for your phone number.  But then they start charging you by using premium SMS fees on your phone bill for huge monthly subscriptions that you didn’t realize you signed up for.  This problem has plagued the mobile industry for awhile and it migrated to these new offer networks.  There are a variety of other abuses.

On the other hand, there is an important role being played by the offer networks.  Some offers provide a good deal and the offer networks let the game publisher filter which ones their customers can see.  Some customers cannot pay and offers provide an alternative.  Some customers are not yet at a level of engagement with a game that would compel them to set up a payment method.  So filling out an offer or two to enhance the game experience can be a bridging mechanism towards both engagement and a better payment method.  This is especially true on the mobile side where consumer smartphone deployments other than the iPhone have gotten ahead of the payment methods.

T-Mobile in the U.S. just announced that they will soon be launching direct carrier billing for their Android phones, so that is a step in the right direction.  But let’s not give up on offer completion networks prematurely.

EA also announced plans to lay off 1,500 workers in what is a continuing trend of disruption of the console game sector.  It was not long ago that the Sony PlayStation dominated gamer mindshare and dollar but look at Sony today.  Even Nintendo is being disrupted by the iPod touch and everyone, even Apple, is being disrupted by Facebook’s massive growth.  The Omni Media explosion is getting everyone to play games but they’re playing on a variety of platforms in a lot of new ways. It is no longer controlled by the big players and their traditional channels.  This is a classic example of Clayton Christensen’s thesis from The Innovator’s Dilemma.  EA made a smart move in moving quickly to nab Playfish and other big media companies subject to digital disruption will need to follow suit.

Then we go to ride the carousel and we get very lucky – the live band from the Mary Poppins’ movie, the scene where the characters ride horses off a carousel into a horse race – actually gets on the carousel with us.  I’m really thrilled by this special moment because we find a horse on the outside that goes up and down that is immediately following the band – we are literally imitating in real life the scene from the film.  But my son is grumpy throughout the ride.  It later develops that he wanted a certain horse and a little girl had beaten him to it.  He was apoplectic and I could not talk him down from the ledge.  So we had to then wait one entire ride cycle to get to be first in line for yet another ride where I could then outrace the other parents to make sure he got the horse he wanted.  If I were to ask him in 20 years about the time we got to ride in the horserace from Mary Poppins, I am sure he’d only say, “All I remember is that girl stole my horse”.  Ah, parenting!

I then enjoyed the hilarious irony of the Pinocchio ride that features Pleasure Island – a place where self-indulgent adolescents go to overindulge and are turned into overstuffed herbivores.  I wonder if Disneyland realizes they are doing a parody of themselves?

The museum reminded me of my days at Apple where we worked with a former Disney Imagineer named Mike Vance.  Vance had told us about Joe Fowler, the Navy Admiral who managed theme park construction for Disney for many years.  Fowler was famous for being able to do any hair-brained scheme that Walt could dare to come up with.  Walt went on the Pirates ride before its debut and felt there was something missing.  He decided that the bayou needed fireflies.  A lot of engineering managers would have blown a gasket at this point on a project and would have said it was too late, over budget, would kill the schedule and should have been specified earlier.  And would have been indignant.  Admiral Joe Fowler just said, “When do you want them, Walt?”  The fireflies are one of my favorite things at Disneyland and I still remember the first time I went on the ride and kept studying them until I figured out how they did it (same thing with the clouds that go past the moon; in both cases really simple and elegant design solutions).  Well, I remember at Apple that after hearing this story some of us gently suggested to our engineers that they should be more like Admiral Fowler.  They didn’t agree.  In fact one of them went and got buttons made with the slogan just to mock us.  Ironically that guy later got fired for complaining that I was insisting that they use a mouse for user input and refusing to cooperate about it.

1.         Less is More.  Advantage goes to mobile and casual game publishers who grew up doing this.  Console, boxed PC and MMO publishers are at a big disadvantage because their brands stand for hardcore immersion.

2.         Socializing.  Current advantage goes to publishers and platforms that enable virality through virtual worlds, social networks and the iPhone.  Console and PC publishers are again behind the curve, and so are the casual game portals that are too much like retail stores.

3.         Convenience.  Big advantage to mobile publishers because mobile devices are the ultimate in convenience and “thin clients”.  Similarly, web services including social games and virtual worlds are capable of making the transition to mobile as the mobile web gets established.  Publishers of conventional web downloadable games, MMOs and boxed games are at a disadvantage because their game files are enormous and not portable.

4.         “Checking In”.  Even the consoles now have online communities but the long-term advantage will go to game publishers that are cross-platform and “in the cloud” rather than being platform-specific.  This is wide open because nobody is yet truly cross-platform or legitimately operating on the SaaS (Software as a Service) model.

5.         Ubiquity.  There is a short list of classic games that, like Tetris, add brand power on top of ubiquity.  But to grow the market it will take many original new games that have mass appeal and that are worth talking about with your friends.  Hence the long-term advantage will go to publishers of the best original casual games.  Again the console, PC and MMO publishers lose the edge because they stand for high performance, not ubiquity.

6.         Short Sessions.  Because they have been doing this for years, the big advantage goes to publishers of the best original mobile and casual games.  Social game companies have been doing this with the so-called “hamster games” but are trying to improve their game design skills.  Once again the console, PC and MMO companies are in the wrong position both in terms of brands and technology.

7.         Personalization.  The virtual worlds and social gaming companies have the lead, but every game company does this to some extent and understands the principles.

8.         Games as a service.  Companies that already operate client-server networked games should have the advantage here, but I don’t believe that brands, technology and skills from an MMO will translate into success with Omni Games as a Service.  Also, all of the network game companies are entirely too native and dug in on particular platforms, ranging from Xbox LIVE to Facebook or even the iPhone.  To succeed with Games as a Service a publisher has to be cross-platform, an area where some mobile publishers have the edge because they have already organized their technology to deal with device fragmentation.

9.         Cross-platform.  Today, nobody really has scaled a product line or a major service across all the relevant gaming platforms, so this concept is wide open.  But again the clear edge goes to companies that already have a development process that plans for all platforms in advance.

10.        Access points.  A big edge here for companies that are already accustomed to free games that are delivered from a server.  Many of the larger and more mature game companies don’t believe you can make money this way, so they are out of position.  This is true whether they are virtual worlds, MMOs, PC, console or even casual web game companies:  all of them want you to purchase and install a large client on one specific platform that will be your only access point.

Because of these leadership characteristics, we also look pretty good on another somewhat odd metric:  if a consumer enters a single digit into the App Store search feature there is about a 20% chance that Digital Chocolate will be one of the top “recommendations”.  This is not some SEO trick it is simply the result of being so dominant in downloads and the apparent fact that the search system proposes recommendations based on what other customers have been looking for and downloading.  When a whole lot of people are looking for Digital Chocolate, the search engine sees some of these letters or numerals and it thinks, “oh, you must be looking for Digital Chocolate, everyone else is”.  We’re the # 1 recommendation for the letters “D” and “H” and the numeral “3”; and the # 2 recommendation for the letter “C” and the numerals “3” and “9”.  For the numeral “3”, we comprise the top 3 recommendations (3D Brick Breaker Revolution, Haunted 3D Rollercoaster Rush and 3D Rollercoaster Rush).  We even show up in the top handful of recommendations for the letter “I” which is apparently because of the word, “Inc.” at the end of our company name.  No doubt tens of thousands of apps have the letter “I” in words like this but they’re not getting the download activity that we are.

So indeed, Tower Bloxx on the Xbox has amazing graphics including nice touches like the enormous hand that you can use to straighten your tower to make perfect sets.  And the high-altitude 3D views from the airplane rides you can unlock.  But God is in the new details:  avatars in multiplayer modes and that spawn and control stuff like the crane; wacky power-ups like bombs and the Mayor’s Blessing that protects your tower; building a city with a population of 200,000 living in Mega Towers.  My favorite features are the Battle mode where 4 players compete on 2 teams and divide into offensive and defensive roles.  And the handicapping feature whereby the trailing tower gets more value from power-ups, so the trailing team can stay motivated and keep it exciting for everyone.  And of course there are other details like the Friends Ladder and the usual XBLA Dashboard features.  We’re very pleased with our first console game.  Check it out if you have an Xbox or look for the videos on YouTube.