Milestone

I have been looking for a capstone for this blog, and JAMDAT’s recent 10-K filing, and the associated investors’ presentation, provides an excellent opportunity to summarize and to look ahead at mobile game industry.

First, the term “industry” needs a look. We are discussing an industry where the industry leader just completed a $36M year. That makes JAMDAT the big fish in the mobile games pond, and still quite a small fish in the game industry overall. Just as JAMDAT’s S-1 provided a window into the mobile games market at a critical stage of development, we will seek answers to questions about the sustainability and defendability of mobile games as a distinct game publishing market in the 10-K and investor slide deck.

First, the financial numbers:

The investor presentation (http://library.corporate-ir.net/library/18/181/181565/items/141449/InvestorPresentation030805.pdf) is as good a summary of state of the market for mobile applications as currently exists. Because JAMDAT has attained global reach, we can extract from the investor presentation a reasonably accurate picture of total available market and near to middle-term growth prospects. One thing is clear: the market opportunity is still growing rapidly and won’t crest for years to come, due to two fundamentals: First, the penetration of application-capable handsets in the installed base is far from complete. In fact, it is just gathering momentum. Second, the maturing of developing-world markets lags that of Europe, Japan, Korea, and North America. China, India, Brazil, Indonesia, etc. will create a second wave even bigger than the development of the mobile games market in the developed world.

JAMDAT has spent the time and effort to reach the approximately 100 channels – network operators with a “walled garden” market for mobile applications – around the world. These 100 channels have about 1 billion subscribers – about 15% of the population of the planet – which numbers tell you all you need to know about the power of mobile wireless as a distribution system. Without these numbers, mobile games would amount to nothing.

With this astounding reach, what are the prospects for growth? Large, in a word: in 2003, 12% of wireless subscribers could use mobile applications on their handsets. By 2008, that number will be 70% of a still rapidly growing number of subscribers. In 2004, JAMDAT derived only 17% of revenue from international sales. Only 4 channels in the U.S. provided about 80% of JAMDAT’s revenue. With channels already in place, JAMDAT has the seeds in the ground for growing tenfold.

The mobile applications business can be characterized by growth layered on growth, at least through the end of the decade.

Can a target that attractive be defended from companies like Electronic Arts, THQ and other game publishers that grew up in the console and PC games market? For this answer, we need to look back at the trends emerging from last year, and track them over the next few quarters:

Will JAMDAT continue to build up subscription revenue? Here we need to keep a particularly careful watch because new markets will pick up single-player games first, and subscription revenue may, temporarily, become a smaller slice of revenue overall. But the goal remains crucial: If customers are at the distant end of a one-time, anonymous transaction, they could be easily scooped up by a game industry giant barging into mobile games. But if JAMDAT continues to produce sophisticated multiplayer games like their implementation of mobile Scrabble, and attracts communities of subscribers, JAMDAT will be devilishly hard to dislodge.

Will JAMDAT build a mobile brand that helps to keep console publishers at bay? This also seems like a likely bet. JAMDAT is diligently working on this, and it has been a constant in JAMDAT’s history that JAMDAT can execute.

Will handheld consoles ding the mobile games market? I’ll excuse the wiser readers for chuckling, but it had to be asked. Handheld consoles barely ding each other’s numbers, much less those of mobile game publishing. Not this, nor any other apocalyptic outcomes bar JAMDAT’s path.

What about openness? Will openness to out of garden content turn handsets into a medium equivalent to Web casual games, and leave only the Web casual game business model? Among the above challenges, this is the only one that could develop quickly enough that it could be a real threat to the value of JAMDAT, but let’s look at the meaning of “quickly:” Openness to free applications will not come without pressure from VoIP handsets, which will not come before mobile VoIP services challenge the traditional PLMN service providers. And that will not even begin to happen a year, and the challenge will not filter into decision-making about opening content access for at least a year after that, and it also depends on the exact outcome of VoIP handset product formulation, which has not settled on the details of application environments. If JAMDAT stays heads-up about future challenges, branding, community, and subscription revenue will be sufficiently entrenched to overcome even this challenge.

In fact, one reason this is the time to put a capstone on this blog is that JAMDAT’s next two years look like they can be summarized as being the reward for excellent execution thus far. An unknowable is whether mobile games will develop true originality. But they have a long time in which to develop it, and, in the short term, there are more obvious tasks such as incorporating 3d into mobile games.

Still, one can define what originality means: Originality is not just coming up with a new type of game. There are numerous examples in all game media, including mobile, of original but misbegotten games that have no impact at all. Voice games, for example. Originality means coming up with a genre of games, supporting a large number of successful products, that make no sense or have no value in media other than the mobile handset and mobile data network environment. How is that going to happen? It will happen when a successful, fun-to-play mobile game defines a new genre by including unique aspects of the mobile environment. Given that applications of any type that take unique advantage of the mobile environment are thin on the ground, I’d advise against holding your breath waiting for this to happen.

Instead of going for cyanosis, a better way to pass the time waiting for that truly original mobile game is to read my other blogs:

The 4th Screen
Telirati

Not As Bad As It Sounds

JAMDAT had their first quarterly conference call with the release of their first earnings results. The call sounded awful. If you have been following the stock, you know the result: JMDT fell 30% in a couple hours.

The temptation is to look for an apocalyptic reason for such a thudding fall. But if you read the transcript of the call, you might be left wondering “Dude, where’s my eschaton?” It doesn’t read nearly as bad as it sounds.

What did JAMDAT do wrong? Gross margins slipped, surprising analysts. And, to make a bad day worse, they insisted they could still hit a lofty 25% pretax to an audience that was already peeved and skeptical.

There are reasons the transcript reads better than the call sounds:

• The call sounded hurried.

• The presenters did not connect the facts. Easy to see on paper, but in a conference call, they should have slowed down and made the connections explicit.

For example, analysts asked about the decline in gross margins: Two responses, among which it is easy to see the relationship when reading the transcript, provide a good reason for this to happen: First, and most directly, JAMDAT’s brand licensing costs are going up. Second, and this was left unconnected to the first, 20% of JAMDAT’s products produce 80% of revenue. Guess which have a license burden.

JAMDAT would do well to continue to license more brands while building their own. Building a brand costs tens of millions of dollars, and JAMDAT is still too small to do as, for example, Intel did in buying instant brand recognition. JAMDAT won’t be a fully developed brand for another two years. In a business with no end user marketing, identifiable brands are the only form of marketing other than joint promotion with the MNOs.

If JAMDAT’s products really follow the 80/20 rule, the revenue ratio is about 10X, after tossing out outliers. Is 10X more revenue worth losing 10 points of gross margin? You bet, especially when JAMDAT is following the game-industry recipe of brand-building to get out from under the need for licensed brands.

That accounts for most of the damage, but there were other points where a stronger response could have been made: Subscription revenue, for example. The numbers make it look as if subscription revenue remains constant at about 30% of total revenues. Management was asked about that, and about plans to grow that number. This is important because mobile games have to get to a business model centered around acquiring and keeping subscription customers.

Understanding this number really requires looking under the hood:

• Verizon probably accounts for nearly all of JAMDAT’s subscription revenue.

• JAMDAT added numerous new channels, none of which are nearly as well-developed in subscription revenue as Verizon (and the Qualcomm BREW m-commerce system). Many have no subscription revenue at all, and untried m-commerce mechanisms for subscription charging.

• JAMDAT still relies on subscription purchases of single player games. Multiplayer games are still a small part of JAMDAT’s business.

• Verizon’s strong growth kept JAMDAT’s subscription revenues up.

• A key ratio was left out: The fraction of subscription customers. Subscribers account for half of all transactions – an impressive number! They account for 30% of revenue, because each monthly subscription transaction is less than half the amount of a one-time purchase. Now let’s say a subscriber is worth 5X a one-time purchaser (a DCF value of $15 versus $5 net for a purchase). This means the 7% of customers on subscriptions provide 30% of revenue!

All this can be inferred from the channels’ share of revenue and some knowledge about how well subscription revenue works in the BREW m-commerce system, but outsiders were left wondering. CEO Mitch Laskey did point out that many new products are subscription-only. It would have been better to have a more fact-filled road map: Plans for increasing the number of subscription products, and projections for the development of subscription revenue in other important channels, like Sprint, that now have reasonable support for monthly recurring charges in their m-commerce systems.

JAMDAT recently recruited a new head of studio technology. They must have some plans to bring technology development, including multiplayer, into a coherent strategy to grow recurring revenue. Maybe we will hear more about that on the next call.

Where will JMDT go from here? In a business where 90% of revenue growth is yet to come, it all hangs on the perception of JMDT relative to a peer group. But what peer group? The early-IPO penny stocks that have a fraction of JAMDAT’s revenue? Gameloft? On top of which, if 90% of all revenue growth is yet to come, something like 97% of subscription revenue, which will be the core of a mature market, remains undeveloped, and will likely only fully emerge after global channels are opened and original content starts to take off. It is relatively safe to say that JMDT’s orbit is still well inside the radius of a fully developed mobile entertainment market, and still shows continued good execution of a plan firmly grounded in the game industry.

You'll Wait to Know What I Really Think

JAMDAT had their first earnings call last night.

A detailed analysis will be posted in a few days.

Conclusion #2: Passive Media Pave the Way

Only a miniscule minority of mobile handset users play games. JAMDAT can reach 850 million potential customers today. If they sell $40M worth of games in 2004, they will have reached 5-7M individual customers – about 0.75% of the total available market.

There are two ways to interpret this number:

• One way to look at it is to see upside in the current low penetration rate. JAMDAT could grow twenty-fold, or even forty-fold, to revenues over $1billion, based solely on today’s-technology today’s-price mobile games.

• Another way to look at it is to see lack of uptake, awareness, and/or acceptance of mobile games as entertainment.

Two billion people, and likely more, will have mobile handsets, almost all of them capable of playing mobile games, within the timeframe for mobile game publishing investments to realize their potential. There are two facts that make mobile handsets particularly interesting as an entertainment medium:

• They are the one device that will be carried at almost all times by every human that can afford one.

• They can connect to the Internet from any point on the planet those humans are likely to be.

These two facts taken together: universality and pervasive connectivity, mean that mobile handsets can become a more powerful entertainment medium than terrestrial and satellite television. A company that establishes a dominant, or even a long-term viable, position in a business that could become that large will be very valuable. But only if people actually begin to see their mobile phone as an entertainment medium.

One possible outcome is that the problem of awareness of mobile games is solved by passive media, such as music, paving the way for universal awareness of mobile content and commerce. This could also have a positive effect on prices: MMO players see their $10-$20 per month subscriptions as a good value compared to cable TV.

There is good evidence for passive media paving the way for mobile interactive media in developments such as Qualcomm’s FLO technology. Passive media have the advantage of a readily adaptable backlist and large sources of new content, and passive media are easier to understand. There is nothing wrong with the continued viability of ring-tones as a business, particularly if it leads to mobile phones becoming competitors to broadcast radio and television media. Such developments can only cement the place of the mobile handset as the “fourth screen.”

When will mobile interactive media emerge to challenge passive media, as MMOs challenge TV at home? At least one uniquely mobile type of game product will have to emerge. More likely, there will be, in a large, mature mobile entertainment market, a set of several genres and types, each with a distinct audience, and value that supports pricing comparable to – for example – an XM Radio subscription.

Just as videogame history was replayed at high speed in the early development of mobile games, so will be the relationship of passive and active media that emerged in the development of the Internet.

$439 Million

JMDT ended its first day on NASDAQ with a market cap of $439 million. That is about ten times expected revenues for the current year. JMDT opened at $16 per share and closed at $22.51, up 45%.

It's good to be JAMDAT. Comments on online boards were generally positive, and, siginifcantly, they were mainly in the context of the impact on the game indutry in general. JAMDAT is being compared to THQ, not Dwango and Summus, two mobile game makers that are public early in their development.

JMDT's debut had some effect throughout mobile games: DWGN.OB volume spiked on JMDT's debut, but the price sagged to $1.40 from $1.51. SUMU.OB. also had a fairly busy day but the price when almost nowhere to $0.28 from $0.29. BBMF, an Asian mobile game maker that has jumped in with relish in the mature and crushingly competitive iMode market doesn't have their stock price data up yet. They, too, are a reverse-merger "IPO" in mobile games.

JMDT has brushed off associations with the penny stocks in moible games, so who to compare them to? Gameloft (GFT:FP, Bloomberg) has been public since 2000, and their association with Ubi and the Guillemot family made them an instand top-tier player in mobile games. Both JAMDAT and Gameloft have comparable approaches to the mobile game business: translate console game management experience into solid results in mobile games.

Gameloft shares have taken a beating in September, so there are high volume days recently that probably have nothing to do with JMDT, so let's take a longer term comparison: TTM revenue at Jamdat and Gameloft are within 20% of each other, but Gameloft's market cap is a more earthbound $149 million. Gameloft's revenue are growing fast: up 239% over the first half of 2003.

While the share prices are difficult to compare, revenue growth at Gameloft shows that a top-tier mobile game company with a base in Europe that is expanding into the U.S. can have growth that is comparable to a leading U.S. mobile game company that is expaning into Europe.

As other companies join JAMDAT in the stock market, we will be able to discern the long-term trends in mobile game value: Will it devolve to the grind-em-out approach taken by BBMF, or will mobile games become a powerful medium with high value content, and a revenue base that could add up to rival the rest of interactive entertainment put together?

Conclusion #1: I’ll Never Have That Recipe Again

This blog is about learning from JAMDAT and peering into the future of mobile games based on JAMDAT’s S-1. But an S-1 is a history as well as a prospectus: JAMDAT was born in unique circumstances, and the simplicity of JAMDAT’s mission is unlikely to be repeated by new entrants to the mobile games industry.

JAMDAT was created using strategic money. JAMDAT was charged with going forth and publishing mobile games. JAMDAT’s management understood this mission as an analogy of their experience in the console games industry. JAMDAT’s execution has been excellent, with the exception of cases where JAMDAT tried to put games into markets or technologies that never delivered, such as WAP.

Can there be more JAMDATs? Yes. The mobile games industry is growing at such a fast pace that multiple JAMklones will each grab a slice of market share. But few additional JAMklones will get funded from this point forward.

JAMDAT and its close cousins succeeded without having to find a breakthrough product. There is no game that is uniquely mobile, except for the failed experiments in location-based games. With no product unique to the medium, the mobile game publishing business is still open to being turned upside down by new products and technologies.

Every other publisher in mobile games operates under different circumstances: Investors demand patent-protected IPRs (as well they should); Channels demand a greater emphasis on both brands and originality; Competitors crowd in and force publishers to specialize, seek unique angles, and outthink rather than out-power competitors. The next stage of mobile games will be different from what JAMDAT is today. Perhaps it will be what JAMDAT becomes.

JAMDAT does provide a lesson that can be duplicated in areas other than mobile games: Find an application of the mobile network that equipment makers and network operators think will drive use of the mobile wireless network. Seek out the strategic VCs, and ply them with pitches that conform to industry projections of how mobile wireless could extend its reach. Combine strategic money with non-strategic VCs convinced they can ride along to a happy conclusion. Voila! Now all you need is to be as good at executing your mission as JAMDAT.

Mobile Games Are Not a Hits Business

The solidity of JAMDAT’s performance is clear throughout the S-1 document. But there is one place where JAMDAT’s management shows signs of having a vain hope:

Our applications undergo a rigorous "greenlight" process. Executives from our sales, marketing, studio, distribution and finance departments all participate in this process. As part of this process, we evaluate every application in development at major milestones from concept to application release.

The workaday aspects of this process are fine. Plans must be clear, and budgets reasonable. Projects that are failing need to be fixed or halted. But the word “greenlight” implies more than just stopping bad projects. JAMDAT, like traditional console publishers, and like the entertainment industry in general, tries to pick hits. Management gathers in committee and tries to read the signs of success in a proposal, a design, a title.

Picking hits is futile, especially at this stage in the development of the mobile game business. This is demonstrated in JAMDAT’s own numbers, in which Bowling continues to dominate revenue despise JAMDAT pushing the boundaries of mobile play into console action titles with the titles they licensed from Activision.

The mobile game business has yet to have its first real hit. Bowling succeeds because it is has been available longest, is available everywhere, and has been used as an example in promotions by network operators to develop awareness of mobile games.

Another way to illustrate that mobile games don’t have true hits is to consider that some of the best mobile games are arcade classics – games that have risen to the top among hundreds of forgotten arcade games. But can you imagine playing a “mobile classic?” Will JAMDAT Bowling, or any other original mobile game currently in the market be remembered as a great game? Mobile game players are still waiting for a uniquely mobile game that strikes a chord in the market.

And, not least, JAMDAT’s own performance, based on consistently strong execution, debunks the notion that mobile games are a hit-picker’s business.

Total Market Size: 850 Million People

JAMDAT has now entered, but not fully developed, major channels throughout the world. The number of potential customers in these channels represents the great majority of customers in markets that have sufficiently developed economies to contribute measurable revenue to JAMDAT’s results. How big is the market that JAMDAT can now reach?

We have agreements to distribute our applications in 38 countries through 72 wireless carriers, whose networks serve approximately 850 million subscribers. These wireless carriers include AT&T Wireless, China Mobile, Cingular, mmO2, Nextel, NTT DoCoMo, Orange, Sprint PCS, Tata Teleservices, Telefónica Móviles, T-Mobile, Verizon Wireless, Vivo and Vodafone.

850 million subscribers. If there are about 1.3 billion subscribers worldwide, JAMDAT can reach 65% of the total, indicating they are not quite done with channel development, but are on the down-slope of that effort. As JAMDAT reaches the practical limits of channel development, the number of mobile subscribers will also continue to grow. Analyst predictions are in the neighborhood of 2 billion subscribers by 2008.

For a mobile games publisher, the practical limits of channel expansion, relative to the total number of mobile subscribers, depends on the technology to reach those subscribers through mobile commerce systems deployed by network operators. JAMDAT’s 65% reach of total mobile subscribers today indicates there is no problem with mobile commerce coverage. In markets where customers can afford mobile games, the systems to sell to those customers are in place.

There are two key facts about the mobile entertainment market (and mobile commerce in general): First, the numbers are very very large, on any yardstick for any market you would care to compare to. Second, the speed and economy with which relatively small vendors can reach this market is unparalleled. Imagine this: In 2008 or 2009 a product manager at a mobile games publisher will, with a couple days’ work at his desk, be able to make a product available in 100 channels worldwide, and put that product within the reach of more than 1.2 billion customers.

These are not cracksmoking dot-bomb numbers. These are numbers that have a solid foundation in other much larger markets for mobile handsets and infrastructure equipment. The order book at infrastructure equipment makers already records the tens of billions in purchases by the network operators who have already accepted and deployed mobile data and mobile commerce systems.

Channels, Concentrations, and the Global Channel Outlook

Although channel concentrations, in this day of Wal-Mart, are seen as unavoidable, it is worth taking another look at this particular concentration in JAMDAT’s numbers in order to understand what this concentration means, and what the trends are.

While JAMDAT Bowling’s huge numbers indicate a slightly disturbing lack of sophistication in mobile games, the channel concentrations are less a cause for concern and more an indicator of future promise. In 2003, 75% of revenues came from Verizon and Sprint, and in the quarter ended March 31, 2004, this percentage declines to 68%. This concentration is both unavoidable for a company as dominant as JAMDAT in these channels, and the trend is in the right direction.

JAMDAT now has relationships with 64 network operators plus a further 8 indirectly through distributors. There are about 300 network operators worldwide. Of these, 30 or 40 are big enough, and they operate in countries with sufficient economic development, to contribute significantly to a mobile publisher’s revenue. By the end of 2004 JAMDAT can have global reach to all the top markets, depending on how aggressive they are about entering Asian markets. By the end of 2005 JAMDAT will be done developing new channel relationships.

While some channels are getting a bit crowded, and even JAMDAT had to enter into 8 distribution partnerships, network operators are still very open to new entrants with sufficient funding to acquires top brands and create quality games. Technology advantages also open doors at network operators’ games portals. Any new entrant at this time can still attain global reach in 18 months and begin mopping up the smaller channels after the first 12 months’ effort in opening the top priorities.

Subscribing by Yourself

Another interesting datum is the amount of revenue JAMDAT derives from subscriptions. This is particularly interesting because single-player, non-networked, unconnected (expect perhaps for high score upload) games are the vast majority of JAMDAT’s revenue.

During the year ended December 31, 2003 and the three months ended March 31, 2004, we derived approximately 32% and 30% of our revenues, respectively, from subscriptions.

Interesting numbers! What are people subscribing to? The answer is: They are subscribing to single-player games. A stunning oddity! People are paying monthly for a game they downloaded once, and can keep forever, and, in most cases, no substantial service is rendered to them after they download the game.

Moreover, the percentage of users choosing to subscribe is larger than it looks: Almost all of that 30% of subscription revenue is probably coming from Verizon and other smaller CDMA/BREW network operators because of the ease of subscription charging in Qualcomm’s BREW mobile commerce system.

Mobile game customers will pay by subscription, even when they can buy the game outright and no further services are provided. There is little or no barrier, then, for a provider of mobile connected games to get customers to pay by the month for the ongoing service provided in both simple multiplayer and persistent-world games.

News Item: WAP is Dead

Where JAMDAT’s use of capital didn’t contribute to its success, the fault lies not in execution, but in being too early: JAMDAT was an early participant in mobile entertainment – before mobile handsets were ready to support BREW and J2ME applications. WAP games such as Gladiator were JAMDAT’s first foray into mobile games.

You might expect there to be some WAP revenue in the picture, especially in light of the huge numbers JAMDAT Bowling continues to produce. But according to the S-1:

We derived… 97% of our revenues during the three months ended March 31, 2004, from a combination of BREW and Java applications.

Yes, if you hadn’t heard, WAP is dead.

Today’s Addressable Market

The other numbers that mobile publishers grapple with are those that determine the real size of today’s addressable market. JAMDAT chose the ARC Group for the following data:

The primary growth drivers of our business are the number of mobile phones in the market capable of downloading our applications and our ability to deploy our applications to those mobile phones—primarily through our carrier relationships. We believe that over time the majority of all mobile phones worldwide will be capable of downloading data applications through application environments like BREW and Java. According to ARC, worldwide mobile phone sales are expected to grow from 465.0 million units in 2003 to 689.1 million units in 2008. In addition, ARC estimates that sales of mobile phones with BREW are expected to grow from 11.6 million units in 2003 to 75.6 million units in 2008, and sales of mobile phones with Java are expected to grow from 95.5 million units in 2003 to 594.9 million units in 2008, collectively representing approximately 97% of all mobile phones expected to be sold in 2008. According to ARC, sales of BREW handsets in North America are expected to grow from 5.5 million units in 2003 to 31.0 million units in 2008, and sales of Java handsets in North America are expected to grow from 7.3 million units in 2003 to 71.6 million units in 2008, a 52% compound annual growth rate.

The good news here for mobile game publishers is in the staggeringly large numbers. Mobile handsets outsell PCs by four or fivefold. They outsell consoles by about fifteenfold. In 2003 more than 20% of new mobile handsets were game-ready. By 2008, this percentage will be as near to 100% as it is likely to get.

JAMDAT has picked numbers they believe to be reasonably accurate. However, we get only annual sales figures for game-ready phones, not an installed base, nor any data on what portion of the installed base gets used to download games. This illustrates the relative blindness of the mobile publishing industry.

Will mobile handsets be put in the shade by mobile consoles like Game Boy DS and PSP? Or will mobile handsets become an entertainment medium rivaling television in universality? These numbers don’t reveal the answer. The mobile entertainment industry needs to know its customers better by the time this challenge arrives.

Channels Worth Mentioning

The first part of the MANAGEMENT'S DISCUSSION AND ANALYSIS section that draws my attention is the channels (network operators’ portals) JAMDAT mentions:

• Verizon’s Get It Now
• Sprint’s PCS Vision
• Vodafone Live!

For mobile publishers not entering Asia yet, these are the channels to pay attention to. They will be the most remunerative for JAMDAT and, probably, for other publishers, too. Reliable data on the effectiveness of mobile games publishing channels is hard to come by, and the anecdotal information from publishers who do not have the scale of JAMDAT can paint a confusing picture. This is a good guide to what really matters.

Phones Could Be Open

One of the risks JAMDAT has identified is that phones could be more open in the future: They may be able to access Web pages. They might have Flash or full Java VMs, in addition to HTML browsers. They might be able to run applications that don’t originate in network operators’ walled-garden portals.

This one is actually a substantial risk for the entire mobile games industry. JAMDAT lists this as a risk among other risks that can be easily dismissed. And, of course, an S-1 filing has no requirement that every risk has a response. Openness is, however, the bear in the woods: Walled-garden portals and locked-down application execution environments mean that mobile application publishers can charge the full amount of the mobile premium – the amount people are willing to pay to take an application mobile. Many mobile games would be the equivalent of ad-supported games on the Web, and if the Web and its application execution environments appear in mobile handsets, that will be the end of Web shovelware commanding a price that is a high multiple of ad revenue.

The good news (if you are on the selling side) is that open handsets won’t be here soon, and they won’t be cheap. Network operators like their walled gardens, and will defend them. However, in three or four years, the walled garden may be under siege. At that point, mobile game publishers will have to have games that merit a price not just because alternatives are locked out.

International

International sales were 18% of revenues in the first quarter of 2004, up from 14% in 2003. JAMDAT has accumulated a long list of international channels, but, as the numbers show, getting results from channels takes time.

JAMDAT faces additional international market challenges due to brand licenses often being region-specific, due to regional tastes, e.g. American football and NASCAR not being well-known or popular in overseas markets, and due to lack of development in mobile entertainment in many markets.

Competitors such as Gameloft have grown up in European markets, so the money is there in some overseas markets. It is likely that JAMDAT will reap significant revenues overseas, but perhaps not until 2005.

Key Concentrations

While many aspects of the S-1 show that JAMDAT has executed a simple model and driven it to maturity, an examination of concentrations of revenue reveal that JAMDAT, and the whole mobile games business, is still immature in many ways.

JAMDAT Bowling still accounts for 24% of JAMDAT’s revenue in the first quarter of 2004. That means JAMDAT could very well sell $7M-$10M worth of JAMDAT Bowling this year.

And there is no wonder why JAMDAT likes BREW: Verizon’s Get It Now was the source of 50% of JAMDAT’s revenue in 2003, and 42% of revenue in the first quarter of 2004.

The Cash Valley and the Cash Mountain

Studying an S-1 is always a good opportunity to benchmark your business or your business plan against someone else’s. In this case, an important set of numbers is found in JAMDAT’s revenue and profit in 2002, 2003, and the first quarter of 2004.

JAMDAT went from $1.6M in revenues in 2002 to $13.5M in 2003. JAMDAT lost $6M in 2002 and $7M in 2003. JAMDAT’s total deficit is about $19M. What did JAMDAT buy with the investor’s money they spent?
JAMDAT bought a 2004 where, with enough products, and enough channels, they are made $7M in the first quarter and a profit of $0.7M. With continued growth, JAMDAT may top $40M in revenue this year, and can be solidly profitable. Their business plan worked, and will continue to work. Soon JAMDAT will pile profits on top of the cash they get from the IPO.

Now that JAMDAT is out of the cash valley, and bringing in $84M from an IPO, what will they do? One obvious target for a weapon of that caliber is establishing dominance in key brands – mainly sports brands, with their complex multiparty licensing. JAMDAT will do to sports brands what EA did: Get exclusivity where they can and crush competitors by spending more on product development where they can’t get exclusivity.

This also illustrates how JAMDAT has scaled-up the mobile brand strategy as a defense against console publishers: If JAMDAT can acquire long-term exclusives on sports brands, they can keep EA at bay as long as those exclusives are in place.

How Will We Spend It?

So, if there is no technology magic, and if the strategy is to keep executing strongly, what is JAMDAT going to spend $84 million doing? This is what they say:

We have not determined a specific use for the net proceeds received by us from this offering.

What they have not said about technology, strategy, and use-of-proceeds frames the picture of JAMDAT: We make this many games, we are in this many channels, we have these brands, we make this much money, and we expect to do much more of this in the coming years. And they are probably right. Mobile games are only 5% of the way to maturity as a market – perhaps less. JAMDAT isn’t going to run out of room to grow for a very long time.

Strategy

Along with saying almost nothing about technology, JAMDAT is similar diffident about strategy:

Publish High-Quality Entertainment Applications.

Enhance Our Distribution Channels.

Build the JAMDAT Brand.

Got that? Don’t publish bad games. Sell them everywhere. Put your name on them.

JAMDAT isn’t about outthinking their competitors. JAMDAT is about out-executing their competitors, which, so far, they have done magnificently.

Publishing isn’t a Technology Business

Another indicator of the shape of JAMDAT’s business also follows in rapid succession:

We have created proprietary technologies that enhance our publishing business and enable us to develop and deploy innovative applications to more than 200 mobile phone models.

The remarkable thing here is how unremarkable this statement is. No mention of patents (JAMDAT has filed two). No mention of special sauce of any kind. No mention of anything JAMDAT can do that other companies cannot. So, JAMDAT thinks portability is important. Make a note of that!
JAMDAT is not a technology company. JAMDAT is a game publisher. JAMDAT is a very successful mobile game publisher. But JAMDAT isn’t relying on a technology to prevent competitors from going head to head with them. JAMDAT isn’t playing defense: JAMDAT’s demonstrated ability to execute is why JAMDAT is JAMDAT and other companies aren’t.

This implies many things about JAMDAT’s future, and the future of anyone else in the mobile game publishing business. When mobile game people read this, they should understand they are in the game industry, as is JAMDAT. This isn’t a protected reservation, or it won’t be for long. JAMDAT’s approach is to go straight at the rest of the game industry with an overall strategy that is only slightly adapted to being in the mobile game business.

Not everyone will be able to execute that same approach. How you answer this challenge will be key to your success as a mobile game publisher.

We’re Best at What We Have Worked on Longest

The first indicator of the true shape of JAMDAT’s portfolio comes soon after:

Many of our applications have lasting appeal and continue to generate revenue long after their initial release. Four of our five best-selling applications by revenues in the first quarter of 2004 had been on sale for over 22 months.

Starting early, and working on existing properties, has served JAMDAT very well. Execute, expand on successes, and do it over again.

We are accustomed to think of mobile games as a very dynamic and fast-changing business. But, clearly, execution and momentum play a large role and will continue to play a large role.

Brands

JAMDAT makes first mention of brands in listing their competitive strengths:

We publish a diverse portfolio of wireless entertainment applications. The majority of our 2003 revenues were from JAMDAT-branded applications. We also have license agreements with, among others, Activision, Atari, Microsoft, New Line Productions and Nickelodeon, as well as the NFL, MLB, the NBA and the NHL.

JAMDAT has always been committed to building the JAMDAT brand. They have also successfully become the leader publisher of sports brands in mobile games, wresting that distinction from Sorrent. JAMDAT is taking the core of console game strategy and implementing it in mobile games.

There is some risk in this strategy it is in the fact that Atari and Activision are likely to claw back their brands as they enter mobile games themselves, but that is addressed by using brands from sources other than game publishers. The largest risk comes from the prospect of EA doing to mobile sports brands what they have done in console games: Using their unparalleled market power to turn non-exclusive sports brands into EA exclusives. For now, JAMDAT is the power in mobile games, and can dominate sports brands.

Not Afraid to Like BREW

The format of this blog is roughly linear: to annotate sections of the S-1 and comment on them. So the very next thing that jumps out at me, after finding out just how much JAMDAT is likely to make this year, is that JAMDAT puts BREW before J2ME in listing the application platforms they support:

Manufacturers are increasingly offering mobile phones with multimedia capabilities enabled by technologies such as Binary Run-Time Environment for Wireless, or BREW®, and Java®. Penetration of mobile phones with BREW and Java is expected to grow from approximately 23% of all mobile phones sold in 2003 to approximately 97% of all mobile phones sold in 2008, according to ARC.

Twice they mention BREW first. That is because, in 2003, BREW was JAMDAT’s bread and butter. Now that JAMDAT is fully international, with access to dozens of network operators’ game portals worldwide, BREW is no longer most of JAMDAT’s revenue. But BREW will still be more than 40% of JAMDAT’s revenue in 2004.

JAMDAT has executed strongly enough not to hide the fact that Qualcomm’s BREW, and, by extension, Verizon’s Get It Now BREW mobile commerce store, are where the money is today in North America.

Why

This regulatory filing is something everyone in mobile games should go to school on. S-1 filings require a company to reveal detailed information. Over and above the requirements, the tone and emphasis of an S-1 say a lot about what a company thinks is important.

Taking a company from an idea to IPO is remarkable accomplishment. The commentary here should always be read in that light. Mostly, you will find the observations here about JAMDAT reflect more on mobile games and the viability of mobile games as a distinct sector than on JAMDAT’s incontrovertible success.

The magnitude of that success is right there in the prospectus summary:

Since commencing operations in March 2000, our revenues have grown to $13.5 million for the year ended December 31, 2003 and $7.0 million for the three months ended March 31, 2004. We had a net loss of $7.1 million for the year ended December 31, 2003 and generated net income of $0.7 million for the three months ended March 31, 2004.

In 2004, JAMDAT will exceed $30M in revenue, and might exceed $40M. JAMDAT is profitable.

An obvious question is “Why sell part of the company to raise more capital when you have turned the corner on profitability?” There are two obvious answers: First, JAMDAT probably has a some need for working capital. Second, this IPO provides liquidity for JAMDAT’s founders and investors.