Many, many developers are chasing the mobile gaming market on cell phones, where they try to make exciting game play profitable at $3 a throw. Meanwhile, in a less crowded area of the mobile market a smaller band of companies like MDM Inc, Pocket PC Studios, and tools developer Fathammer are focusing on the elite handheld market where price points ($20 and up) are more lucrative and the opportunity to break through with sophisticated game designs is more likely. PDAs, the new Smartphone platform, the Nokia N-Gage, and some portable platforms that have yet to emerge from Sony and other hardware manufacturers are about to explode, say some of these developers.

"The PDA space is $20 million to $30 million with huge potential upside with new players like N-Gage, TapWave and [more advanced] cell phones," says Barry Cottle, CEO, MDM, Inc., which claims an 85% share of the PDA games market with marquee titles like Age of Empires and Atari Retro. MDM has sold over 200,000 units of its compilation Game Essentials.

There is also a great deal of opportunity here to satisfy under-served niches on a platform that has tended toward puzzle and arcade titles, says G.R. Moore, president of PocketPC Studios, which recently published a handheld version of the classic Warlords II. "RPGs and turn-based strategy are nearly unheard of on PPC devices, thus the success of Warlords II. Sports games are another genre that has little representation," although his company is releasing Hockey Mogul next year.

And the PDA installed base is beginning to rival other platforms, say handheld defenders. Brian Bruning, vp marketing and development, Fathammer, says that 15 million handhelds will be able to handle his company's high-end 3D development platform X-Forge, which runs about half of the N-Gage launch titles. "The growth is tremendous," he says, because consumers are starting to see that they can approach console game quality on elite handhelds and the newest Smartphones. "Java and Brew games will always remain, but consumers want more and they realize that mobile devices are capable of doing more with the quality of 3D games."

The installed base of elite handhelds got at least a PR boost from the recent N-Gage launch, but Bruning says that the momentum will grow in 2004 as more hardware vendors follow N-Gage and the recent Tapwave Zodiac into the gaming craze. "Some major manufacturers of Pocket PCs decided to build gaming into their business model so they don't have to make all their money back on hardware sales," says Bruning. These devices are likely to have 3D acceleration built-in, VGA-resolution screens, and Symbian or Pocket PC operating systems. The multimedia Sony PSP, slated to premiere in late 2004, and Nintendo's inevitable response with its own next-gen handheld will add legitimacy to the handheld market but also bring the dedicated gaming handheld platforms closer to PDAs in power, perhaps allowing for more cross-platform development. U.S. Bancorp Piper Jaffrey predicts that handheld software revenues will jump 20% in 2005, while console game sales will decline as that hardware cycle wanes.

High Margins, Tough Distribution

Despite relatively modest sales for many titles, the margins on PDA games can be quite high, say developers. Cottle has development budgets ranging from $20,000 to $200,000. But he says his company is "doing well" by focusing on titles like Age of Empires and Atari or Sega classics that have built-in brand recognition and play well for the short spurts of time users like to game on a PDA. "It's a hits business," he says.

Developments costs are rising quickly, however, as handheld technology advances to make much more ambitious designs possible. Fathammer licenses it X-Forge 3D development platform for $20,000 plus 5% of sales, and so Bruning says he is seeing titles for the N-Gage and other elite handhelds cost $300,000 to $500,000 to make. In most cases, however, developers have to budget for sales of about 10,000 units. For its new Zodiac platform, TapWave is helping to subsidize its partners' development costs by licensing a lesser version of X-Forge for inclusion in its free development kits.

Sales remain low for some publishers because distribution and visibility have been ongoing problems for the handheld gaming market. Publishers like Pocket PC Studios continue to rely on downloads from the Web, but many users find installing any applications to PDAs an obstacle. While low development costs will provide a good profit margin on the title, "I will consider Warlords II a complete success with 4,000 plus sales over a 12 month period," says Moore. The sector also suffers because it still has many hobbyists who fill the market with cheap or free titles, he adds.

MDM has succeeded in getting much higher sales by distributing boxed product on multimedia cards at 9,000 electronics stores, usually right next to the PDAs themselves rather than in the games department. "We believe in plug and play," says Cottle." Having a package in your hand and not having to download and transfer to a PDA is critical in making the platform work well, he thinks.

Bruning admits, "We can overcome the challenge of making the game, but the distribution, sales, and marketing of these titles is an immense challenge." The proliferation of media card slots on PDAs and Smartphones will help move handheld gaming into retail, although the specialty gaming stores still don't carry even MDM's wares. Bruning thinks that device-to-device transfer of games via Bluetooth is a promising new way that handheld games will be distributed virally by gamers themselves. Moore anticipates that "multiplayer gaming will be commonplace on the Pocket PC in a few years," and he is building a networking API to facilitate peer-to-peer multiplay for Warlords III, which is in development.

Big Players for Little Games?

Not everyone is buying in to the PDA platform, and in fact, game maker and distributor GameLoft is among some companies leaving the PDA arena for what they regard as more lucrative cell phone gaming. "We put our PDA development on hold indefinitely for a year now," says Mathieu Rolland, head of business and marketing for the international mobile gaming portal. "The market growth in PDAs was very slow, while the phone gaming market is experiencing a tremendous growth, about 30% a month."

And while MDM is not leaving PDA development, it, too, is ramping up games for cell phones. Of course, the world of PDAs and cells are starting to merge as elite handhelds like Smartphones (driven by a new Microsoft mobile OS) come to market. Fathammer's X-Forge development platform is meant to exploit this growing similarity among the handhelds and high end phones. "A publisher might have trouble putting in a half a million dollar budget on a Pocket PC title," says Bruning. "They need to justify a larger installed base. We are hoping they build a title for the Smartphone and release it for the PPC with little effort." Fathammer is beginning to see games like Spyhunter, originally developed with X-Forge for TapWave's Zodiac handheld, being ported to a wider range of mobile platforms.

"It has caught the attention of the bigger players because it is rapidly expanding," says Cottle. "The great opportunity in this space is they have a no risk opportunity." Cottle often goes directly to a publisher with an idea for translating a franchise to the handhelds and then brokers a co-development, copublishing deal, but in many cases simply licenses the property. "It's a mix of some sort of prepaid royalty that guarantees that they are going to have a return and then ongoing royalties."

As with mobile game development, the major publishers continue to play it safe by licensing properties for handheld development, although Sega and THQ have mobile divisions that are developing titles in-house for handhelds, and Activision is rumored to be looking at following suit. As the handheld market heats up in the next two years, Bruning anticipates seeing a familiar business cycle among the major game firms. "They are willing to allow other people to pave the way. Once the business models and distribution are defined they will either come in and buy the [smaller] companies that are successful or employ their strategies and use their own huge marketing muscle and development budgets."

Contacts: Bruno Bruning, 408/778-4631; Barry Cottle, 650/961-0636; G.R. Moore, grmoore@ppcstudios.com ; Mathieu Rolland, mathieur@gameloft.com

[Copyright 2003 PBI Media, LLC. All rights reserved.]

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