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Mobile gaming is about to reach its PlayStation 2 moment

Where is mobile gaming going? With Storm8 rumored to be raising $300M at a $1B+ valuation, there’s clearly some big bets being made in the future of this space. Although I don’t always agree with them, I think the VCs are right in this case. Despite the market froth, I believe that mobile gaming (smartphone and tablet) is about to enter its most profitable phase yet.

If you talk to anyone from the console games industry (either on the publisher or retailer side), they’ll tell you that Playstation 2 was the most profitable platform in the console timeline. It represented a major shift in graphics technology and generated greater results for everyone in the value chain. This is also what we’re seeing right now on mobile with high quality games like Epic’s Infinity Blade and NaturalMotion’s Backbreaker  titles. According to figures released by Epic, Infinity Blade cost about $2M to develop and yielded over $11M in revenue. The same ratios are true for NaturalMotion Games (see slide below), according to Torsten Reil, their CEO (whose Casual Connect slides I’m using in this post).

Slide from Casual Connect keynote (Torsten Reil, NaturalMotion Games)

Is this kind of performance going to be consistent with every single developer? Probably not but it will certainly make picking the winners for this generation a lot easier (face it, nobody could have picked Rovio before Angry Birds). The winners in the next-gen space are going to have the following:

  • Clear technology advantage: yes, production technology (engines, animation, rendering) is going to matter again
  • Decent balance sheets: with production budgets of $1M-$2M, we’re not talking about bedroom developers any more (sorry, guys)
  • Mature production processes: Developing a game for $1M is a lot different to making one on ten grand and noodles

If this general theory (production + technology = step-jump in revenue) is correct, then mobile is going to see a lot more revenue growth. Reil had a rather neat slide which summarized this position.

Slide from Casual Connect keynote (Torsten Reil, NaturalMotion Games)

Factor in the almost-certain release of a mass-market iPhone at the end of the year and you can see how the valuations for companies like Storm8 actually make sense. The next-gen games opportunity for mobile and smartphone (cue appropriate acronym) is simply enormous.

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  • Paul Prescod

    You forgot one thing in your analysis: the consumer. Is the consumer of a mobile device in the same mindset as the consumer of a Playstation 2? Is the game play environment the same? Are the user demographics the same? Do they buy products in the same way? What are the characteristics of the purchase channels they use?

    If you think we’ve seen the end of the “Rovios” then I think you’re going to be sorely disappointed.