F O R U M

N O K I A

Introduction to the Mobile Games Business

Version 1.0; March 20, 2003

Games

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Contents
1. Introduction ................................................................................................................................5 1.1 2. 3. Purpose and Scope..................................................................................................5

Market Size ..................................................................................................................................6 Business Models ........................................................................................................................7 3.1 3.2 3.3 3.4 3.5 SMS Games ................................................................................................................7 Browser Games ........................................................................................................7 Interpreted Language Games..............................................................................7 Native OS Games......................................................................................................8 Rich Nokia N-Gage Device Games ..................................................................8

4.

Value Chain ..................................................................................................................................9 4.1 4.2 4.3 4.4 Value Chain with Operator....................................................................................9 Value Chain without Operator ..........................................................................10 Rich Game Value Chain........................................................................................11 Representative Financial Analysis ..................................................................11

5.

Business Opportunities with Nokia ..................................................................................13 5.1 5.2 5.3 5.4 5.5 Club Nokia................................................................................................................13 Tradepoint ..............................................................................................................13 Nokia Software Market........................................................................................13 Nokia OK Testing ..................................................................................................13 The Nokia N-Gage Game Deck Publishing Program ..................................14

Copyright 2003 Nokia Mobile Phones. All rights reserved.

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Legal Notice:
Copyright Nokia Corporation 2003. All rights reserved. Reproduction, transfer, distribution, or storage of part or all of the contents in this document in any form without the prior written permission of Nokia is prohibited. Nokia, Nokia Connecting People, and Nokia N-Gage are registered trademarks of Nokia Corporation. Other product and company names mentioned herein may be trademarks or trade names of their respective owners. Nokia operates a policy of continuous development. Nokia reserves the right to make changes and improvements to any of the products described in this document without prior notice. Under no circumstances shall Nokia be responsible for any loss of data or income or any special, incidental, consequential, or indirect damages howsoever caused. The contents of this document are provided "as is." Except as required by applicable law, no warranties of any kind, either express or implied, including, but not limited to, the implied warranties of merchantability and fitness for a particular purpose, are made in relation to the accuracy, reliability or contents of this document. Nokia reserves the right to revise this document or withdraw it at any time without prior notice.

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Glossary Definitions Term Bluetooth Meaning A local-area wireless networking protocol that allows the transfer of data among devices that are Bluetooth-capable. It provides much lower latency than cellular widearea air networks (typically ~50 milliseconds, by contrast to several seconds), but is much more limited in range (~10 meters). Many high-end mobile phones are now Bluetooth-enabled. A method of transferring data to or from a mobile information device such as a PDA or mobile phone, by synchronizing the phone with a desktop computer. Sometimes rendered CHTML. Compact HTML, a somewhat modified version of HTML used with the browsers provided for NTT DoCoMo's i-Mode service. Java 2 Platform, Micro Edition. The version of Java 2 technology for use with small devices such as PDAs and mobile phones. See also MIDP and MIDlet. Java 2 Platform, Standard Edition. The flavor of Java technology that runs on desktop computers. Sun's name for J2ME applications (by analogy to applet). See also J2ME and MIDP. Mobile Information Device Profile. A set of extensions to J2ME specifically designed for devices such as mobile phones. Multimedia Message Service. A technology that allows mobile phone users to exchange (or send to and receive from a game server) messages that can include text, images, and other media. It is an extension of SMS technology. See SMS. Over the Air. OTA provisioning means the download and installation of applications over the air, rather than via hot-sync or some other method. Portable Digital Assistant. A palm-top computing device. A set of extensions to Symbian OS, initially developed by Nokia but available to all manufacturers as an open standard, that provides additional functionality of specific utility for mobile phones. Short Message Service. A widespread technology that allows users to send each other (or a game server) short text messages. See MMS. An operating system designed for small, portable devices such as PDAs and mobile phones. It is an open OS, available for license by any manufacturer, and supported by most major mobile phone manufacturers, including Nokia. It is an evolution of the EPOC PDA OS, and is developed by Symbian (www.symbian.com). Wireless Application Protocol. The technology that underlines the browser functionality of mobile phones in Europe, North America, and most other regions. The markup language used with WAP is Wireless Markup Language (WML), but recent WAP browsers can also display XHTML/Mobile Profile, a more fully featured markup language based on XML. See also HTML-C.

Hot-sync

HTML-C

J2ME

J2SE

MIDlet MIDP

MMS

OTA

PDA Series 60

SMS

Symbian OS

WAP

Introduction to the Mobile Games Business

Glossary Definitions

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Introduction to the Mobile Games Business

Version 1.0; March 20, 2003
1. Introduction 1.1 Purpose and Scope The following document is intended primarily for use by business people, marketers, and producers who are either currently involved in the business of mobile games, or considering becoming involved. It provides an overview of the current and projected market size, business models currently in place, and the value chain. While the information contained herein is current as of the date of publication, all three factors continue to change rapidly. 2. Market Size Most analysts maintain that in 2001, the mobile games market produced around $400 million in revenues globally. Frost & Sullivan stated that it was a $436.4 million market; the Shosteck Group maintained that it was 458 million euros; and DFC Intelligence/Themis Group offered a more pessimistic figure of $110 million. (One reason for this disparity: The first two analysts looked at overall volume for the market, while DFC/Themis looked at revenues derived by developers, as distinct from the share of revenues achieved by operators or other components of the value chain.) Virtually all of the analysts stated that Asia (primarily Japan and South Korea) is responsible for 80 to 90 percent of current mobile games revenues, with Europe responsible for most of the remainder. Projections for revenue growth range from the enormous ($17.5 billion in 2006, Datamonitor; $9.34 billion in 2008, Shosteck Group) to the more sober (1.114 billion euros in 2005, Shosteck Group; $1.5 billion, 2006, DFC/Themis). Outside of Japan and South Korea, the mobile games market is still at an early stage. However, several operators in both Europe and North America have recently launched Java or BREW game services, and early reports indicate that these services are generating substantial revenues for both operators and games providers. Nokia believes that as advanced handsets such as its Series 40 and Series 60 devices become more widely used, the market for mobile games outside Asia will increase rapidly. Nokia is working to ensure widespread deployment of such mobile phones, and expects to ship 50 to 100 million Java technology-enabled Series 40 devices by the end of 2003, and 10 million Symbian OS Series 60 devices. It should be noted, however, that outside Asia, the market is still relatively small, and investment in mobile games should be considered an investment in future growth, rather than a move that is likely to generate large returns in the near term. It is also a tremendous opportunity to establish early market leadership.

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3. Business Models

The business models in use today vary with the enabling technology. 3.1 SMS Games For SMS games (and games using MMS or other evolutions of SMS technology), operators normally charge users a premium SMS feethat is, a slightly higher fee than for normal messages. They share a portion of this premium SMS revenue with the game providertypically 20 to 50 percent. The game provider must have a business relationship with the carrier to ensure that a short number is provided, to which players may send messages. Thus, developers often make deals with aggregators that have existing business relationships with carrierswireless portals or mobile game publishersto share revenue from SMS games. 3.2 Browser Games For browser gamesusing WAP technology, XHTML under the WAP 2.0 standard, or compact HTML (over DoCoMo's i-Mode network)operators typically share a portion of air-time revenue or (for packetized air networks) a share of data-transfer revenue. This share can range from the meager (typically 10 percent in North America) to the substantial (89 percent for i-Mode). Because inputting URLs on handsets is difficult, game providers achieve substantially higher revenues by ensuring placement of their game on the WAP decks served by operatorsor with manufacturers, wireless portals, or game publishers who themselves have revenue-share deals with operators. This ensures that the game is exposed to many more potential customers. 3.3 Interpreted Language Games Interpreted language games, such as those coded in Java 2 Platform, Micro Edition (J2ME), normally generate revenues on an application-sale basis. That is, the user agrees to pay a one-time fee to download and install the game on his/her handset. The download is normally over the air (OTA), although in some cases it is downloaded to a PC and hot-synced to a handset. In Asia and North America, the operator normally serves a WAP (or other browser) deck to the user, who selects games from that deck. Thus, developers achieve higher revenues by partnering with operators and sharing revenues with them (typically, developers receive 20 to 50 percent of the revenues). Because most operators prefer to deal with a handful of mobile game partners, many developers work with mobile game publishers or other aggregators to achieve placement on the operator's deck. In Europe, where handset sales are not controlled by operators, operators cannot always ensure that the first deck a user sees when s/he makes a wireless data connection is controlled by the operator (e.g., for users of Nokia phones, it is often the Club Nokia home deck). Thus, game developers frequently agree to revenue-share deals with handset manufacturers or mobile portals to achieve access to large numbers of potential gamers. Billing is typically through the portal, rather than through the operator's phone bill. Note that some games access the air network to enable multiplayer games, or to upload high scores or the like. At present, few operators are willing to share the air-time (or data-transfer) revenue that this generates for them, although that may change over time.

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3.4 Native OS Games Games programmed to run on handsets that support an operating system such as Symbian OS are also generally provided on an application-sale basis. Because they tend to be much larger applications, they are normally transferred to a handset via hot-sync, rather than over the air. An additional security issue arises, because most such handsets provide an IR port, and many a Bluetooth port, allowing users to beam each other games (or e-mail an application to another user's PC, from which s/he can then hotsync it). Thus, developers need to provide some copy-protection scheme to maximize revenues. Since users must go to a Web site to find these games, the operator does not control access to the games in any market, and games are normally distributed by handset manufacturers, wireless portals, or other aggregators. 3.5 Rich Nokia N-Gage Device Games Nokia has adopted a different model for "rich games" that run on its Nokia N-Gage mobile game deck. The Nokia N-Gage game deck is a Series 60 device, running Symbian OS, which supports a copy-protected, proprietary memory card format. The device itself is designed primarily to support mobile, multiplayer networked game play, as well as solo play games, with controls optimized for two-handed game play rather than one-handed use as a mobile phone (though it can be used as a mobile phone). Rich games for the Nokia N-Gage game deck are supplied in the form of 8 MB (or larger) memory cards, sold through retail channels, which the user can insert into the device. Nokia N-Gage device copy-protected memory cards cannot be used in other Series 60 devices. Nokia publishes games in this format, and also works with other major game publishers who publish their own titles for the Nokia N-Gage game deck on these memory cards. The business model for rich games is the same model used by the games industry for other console games: Only authorized developers can produce rich games for the Nokia N-Gage game deck; Nokia works to ensure a consistent level of quality for such games, and publishers of such games must pay a "platform royalty" on each copy of the game to Nokia. Nokia uses this royalty to defray marketing costs for the Nokia N-Gage game deck, ensuring widespread deployment of the device and a substantial installed base of users, thereby increasing the overall market size for the benefit of both publishers and developers. As a publisher of Nokia N-Gage device titles, Nokia will often provide recoupable advances against royalties to the developers with which it works, to fund the development of games for the Nokia N-Gage game deck. Nokia defines a "rich game" as a multi-megabyte game application, typically programmed in C++ and suitable for distribution and sale at retail. Because the Nokia N-Gage game deck is a Series 60 device, it is possible to produce smaller J2ME or Symbian OS games for it, and distribute them in the same fashion as other games for Series 60 devicesvia over-the-air installation, or download and hotsync. No platform royalties are due on such games, nor does Nokia provide development funding for them, and such games are typically far smaller and less fully featured than rich games distributed on memory cards.

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4. Value Chain

4.1 Value Chain with Operator For SMS games, browser games, and interpreted language games in Asia and North America, the value chain typically looks like the diagram in Figure 1:

Developer Aggregator Operator Consumer

Figure 1: Value chain with operator

The consumer pays for access to the game. In the case of SMS games, it is generally a premium SMS charge for each message sent to the game server. For browser games, the consumer pays an air-time or data-transfer charge. For interpreted-language games, it is a one-time application fee. The operator passes on a portion of this fee to an aggregator. The aggregator may be a mobile games publisher, a wireless portal, a handset manufacturer, or some other intermediary. The portion of revenues passed to the aggregator varies widely depending on game type, region, and operator, and can range from 5 percent to as high as 89 percent. The aggregator passes on some portion of its revenues to the game developer. The portion passed on also varies widely, but is generally in the range of 10 to 50 percent of the aggregator's revenues. In some cases, it is 0 percentif developers provide games to aggregators on the basis of a one-time development fee, with no ongoing revenue share. Note that some aggregators, such as wireless game publishers, develop some or all of their games internally, rather than through third-party developers, removing one link in the value chain. Also, in some cases the operator does not bill the customer directly, instead using a third-party billing solution provider, which typically takes 3 to 10 percent of revenues. 4.2 Value Chain without Operator For native OS games and for interpreted-language games in Europe, the value chain looks more like the diagram in Figure 2:

Developer Aggregator Consumer

Figure 2: Value chain without operator Introduction to the Mobile Games Business 4

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In this case, the consumer pays, typically, a one-time fee to download and install the application, either over the air or via hot-sync. The aggregator can be a handset manufacturer, such as Nokia, a game publisher, a wireless portal, or a Web site that offers games to consumers. Typically, the game is a downloadover the air for interpreted-language games; via hot-sync to a desktop computer for native OS games. The aggregator generally assumes the cost of dealing with credit card or other billing providers as part of its expenses. The aggregator passes on a portion of its revenuestypically 15 to 50 percentto the developer. 4.3 Rich Game Value Chain For Nokia N-Gage game deck rich games (and console games in general), the value chain looks like the diagram in Figure 3:

Developer Manufacturer Publisher Retailer Consumer

Figure 3: Value chain for rich games

The consumer purchases the game at retail; the retailer bought the game from a publisher (sometimes there is an intermediate distributor). The portion of the retail price paid to the publisher varies widely. Sometimes it is as high as 80 percent, but often it is much lower, particularly when product-placement fees are taken into account. The publisher pays a platform royalty to the device manufacturer, and passes on a portion of net revenues to the developer. Typically, the publisher provides development funding to the developer, which is considered a recoupable advance against royalties, meaning that the developer does not earn any additional money until the advance is paid off by accrued royalties. Royalties to developers are based on the publisher's net revenues, and range widely, tootypically around 15 percent for new developers, to as high as 50 percent for accomplished developers who provide their own development funding and participate in marketing efforts. 4.4 Representative Financial Analysis Let us say that you have developed a J2ME game at a cost of $20,000 in expenses, which you expect to sell to consumers for $5. You make a deal with an aggregatora mobile games publisher, for example that offers game downloads from its own mobile games portal, and also partners with operators to offer games to their customers.

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Let us also say that the mobile games publisher offers to pay you 30 percent of its revenues from the game. Therefore, for games sold through the publishers' portal, you earn $1.50 per game sold. The publisher has various arrangements with carriers, but let us say that it receives 50 percent of revenues for game sales through operators, on average. The publisher earns $2.50 for each game sold this way, of which you receive 30 percent, or 75. Assume that the publisher has relationships with operators with a total of 10 million subscribers, of whom 15 percent have Java technology-enabled phones. That means that your potential market is 1.5 million people. Let us assume that 25 percent of them are interested in playing games on their Java technology phones (a reasonable assumption, since gamers are early adopters of new technology). That leaves you with 375,000 potential customers. Of course, those customers have a choice among many competing games, and only a portion of the 375,000 consumers will download and install your game. But let us assume that your game is moderately successful, and that 10 percent do. That gives you 37,500 sales, netting you 75 apiece, for a total of $28,125. Now, let us say you achieve additional sales through the publisher's own portal; if a mere 100,000 people frequent it, and 5 percent choose to purchase your game, that's an additional 5,000 sales, at $1.50 each, bringing your net revenues to $35,625, for a gross profit of $15,625 above your development expenses. The scenario is all highly hypothetical, but from this analysis, you can see that the key factors affecting your revenues are: Unit price. Higher is better, but you encounter consumer resistance at some price. Total audience exposure, that is, the number of customers you can reach through your distribution partners. The proportion of the audience with handsets that can run your game. The proportion of the audience that is interested in playing games. The percentage of those whom you can interest in your particular game. And, of course, the specific deal terms between you and the aggregator, and between the aggregator and its operator partners. 5. Business Opportunities with Nokia Various potential aggregators and partners exist to bring your game application to marketand Nokia is one potential partner for you to consider. Currently, Nokia offers game applications provided by thirdparty developers in a number of different ways. 5.1 Club Nokia Club Nokia is an online community and loyalty program that offers terminal-optimized digital services to owners of Nokia mobile phones in Europe, the Middle East, Asia, and Africa. Club Nokia Web and WAP services can be accessed once a user has registered as a member of Club Nokia. Club Nokia currently has millions of members. Club Nokia offers high-quality J2ME and Symbian OS games to its members, and is looking for additional titles that meet its standards. More information can be found at http://www.forum.nokia.com/business.

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5.2 Tradepoint Tradepoint is a business-to-business marketplace that connects application developers to operators, service providers, and enterprises. It's one way of putting your application in front of operators and other potential partners for the game. One of the components of Tradepoint is the Java Broker Service, which is specifically designed for the distribution of MIDlets, including games. Many operators have worked with Tradepoint to acquire mobile games for the launch of their mobile game service. More about Tradepoint can be found at http://www.forum.nokia.com/business. 5.3 Nokia Software Market Nokia Software Market is a business-to-consumer market that connects you directly to Nokia phone users. At present, it concentrates on applications for the Nokia 6310i, Nokia 7650, and Nokia 9200 Communicator series. It offers both Java and Symbian OS applications. You set the price of your application, and 65 percent of the revenues are passed on to you. More about Nokia Software Market can be found at http://www.forum.nokia.com/business. 5.4 Nokia OK Testing In the above-mentioned Nokia distribution channels (Club Nokia, Tradepoint, and Software Market), preference is given to applications that go through Nokia OK testing. The Nokia OK process is designed to ensure a consistent look-and-feel for applications offered for Nokia mobile phones, as well as to ensure that the product has been tested on target devices. Once a product is tested, third-party partners can use the Nokia OK logo to inform customers and partners that they can use the product with Nokia phones with confidence. There is a modest fee to defray Nokia's costs in testing your product. More about the Nokia OK program can be found at http://www.forum.nokia.com. Click on the Nokia OK link under the Business Opportunities link, in the right-hand column. 5.5 The Nokia N-Gage Game Deck Publishing Program Nokia and other publishers publish rich games for the Nokia N-Gage game deck in the form of memory cards sold at retail. The first step to Nokia publication is to become a registered Nokia N-Gage device developer. The process for doing this is described in the document Getting Started with Nokia N-Gage Game Deck, which can be found at www.forum.nokia.com/games.

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