Pinch Media on iPhone App Usage

Pinch Media released an awesome presentation about iPhone app usage. I haven't validated their data directly, but if it is accurate it has some very important implications for the companies who think they can make a business with free, ad supported apps.

Check it out:

Most of this is pretty well-known to entertainment and e-commerce people: the hit dynamics, the seasonality, the pricing strategies. But the sharp usage drop-offs suggest that for most apps -- not the highly used, sticky ones, but the vast majority of apps -- too few impressions are being generated to justify an ad model. The key slides are #23-#25.

Futbol Fans, Set Your Tivo's

This afternoon at 4:00pm Pacific time on ESPN is the first match of the CONCACAF World Cup Qualifying "hexagonal" -- U.S. v. Mexico. All the stars are back from Europe for this intense rivalry.

These teams absolutely despise each other. The Mexicans dominated the series from the 1930's until around 10 years ago. But in the last decade the US is 9-1-2 against them, the only two losses coming at Azteca Stadium in Mexico City, one of the toughest road games in the world. The nine wins include the humiliating (for Mexicans) 2-0 result in the 2002 World Cup finals in Korea, which propelled the US to the quarter-finals.

In order to prevent the Mexicans from enjoying a large expat crowd, US Soccer is holding the match in Columbus, Ohio, where only 2% of the population is Hispanic. They reportedly sacrificed over $1MM in gate revenue to hold the match at the most unfriendly venue possible for the Mexicans -- cold weather, small (24K) but vocal pro-US crowd, no Mexican population.

Should be a great game. Lots of compelling story-lines, including whether the Mexico coach, Swede Sven Goran Ericsson, keeps his job. As a US player once said, "When you beat Mexico, you're smiling for a month."

What I Learned About Platforms From Working With Carriers

Almost two years ago, I predicted that the future of the internet may look more like mobile than vice versa.

I was referring specifically to the growing influence of platforms -- i.e., large traffic aggregation points with API's and/or application eco-systems. It seemed inevitable that these platforms would end up playing a similar role in the internet to the role of the carrier in mobile. That role is something of a double-edged sword for the smaller companies in the eco-system: on the one hand, a phenomenally efficient means of customer acquisition; but on the other, a powerful and potentially capricious master, who controls the flow of money, owns the customers, and can snuff your business out like a candle if need be.

The precipitating event for me back then was Myspace's power move on Photobucket, where the social network blocked the photo sharing site for violating terms of service relating to advertising. Myspace was probably a third of Photobucket's business at the time. Thirty days later, Photobucket was acquired by Myspace's parent, News Corp. That felt to me like the kind of thing a mobile carrier would do to a vendor. Show 'em who's the boss.

Since then, my prediction has largely come true. I was talking to the CEO of a company the other day who makes applications for a large social network, and I had an uncanny sense of deja vu. He was losing sleep over whether or not the social network would change its terms of service, alter the economics of customer acquisition, or choose an incompatible monetization strategy and effectively kill his business. I remember having those same fears when we were launching services on the US carriers in 2002-3.

So, what did we learn from being in this position and growing a valuable, public company under this Sword of Damocles?

• Brands Matter. First, when we were jockeying for position with our largely undifferentiated peer group in the early days, having recognizable and desirable brands under license really helped us. Having exclusive rights to branded content cemented our distribution -- while other companies were offering generic, easily replaceable card or puzzle games, or original intellectual properties that nobody had ever heard of, we brought Tiger Woods Golf (interestingly, it mattered way more to the carriers than to customers -- JAMDAT Bowling consistently outsold Tiger). Later, the power of our own publishing brand, which had become increasingly recognizable and synonymous with quality and value, gave us a similar kind of brand leverage to what MTV or HBO had vis a vis the cable companies. If you were launching a new games service, you had to have us in the mix.
  
• Grab Market Share. Immediately after the launch of BREW on Verizon, we had >70% market share of the games category. In the US broadly, by the end of 2005 when we sold the company, we had close to 30% market share (this is huge share; my rule of thumb in media businesses is that the winner in every category -- music, video games, TV, theatrical box office -- aggregates roughly 15-20% market share). By 2005, mobile games were no longer experimental; our partners at the carriers had P&L's and were being compensated on the basis of financial performance. Therefore, with our huge share it became harder for them to mess with us too much and their relationship with us became more symbiotic (the proverbial "win-win"). Had we been a <5% player, they could have eliminated us without significant consequence.
  
• Understand Their Strategic Needs. The carriers had their own businesses to run, of which we were a very small part. But the mobile games category fit into a larger story they were telling their shareholders about the future, and it was imperative for us to understand their strategy for mobile data broadly and help facilitate its execution. For example, they needed to be able to show that they could attract world-class content, so our investment in globally recognizable brands played into their strategy. We tried to help anticipate and solve their problems. We always tried to see ourselves from their perspective.
  
• Don't Be Piggy. Our peers constantly complained about the revenue splits that the carriers were taking (in our case, 20-40% of revenues). We watched those splits closely, and argued fiercely to maintain them, but we were always cognizant of what we were getting in return: relatively frictionless customer acquisition, billing and collection, the benefit of handset subsidies, etc. If we did the math realistically, the toll we paid to the carriers was a relative bargain. As many of the iPhone companies are soon going to find out, trying to run a nationwide marketing campaign -- even a viral one -- to attract people to your content is very, very costly. Our better carrier partners would embed demos of our games with a link to buy on tens of millions of handsets every year -- reach that would have cost us millions of dollars in marketing if we had to pay for it directly.
  
• Plan for End Times. We understood the fragility our our place in the eco-system. Even when we had 30% market share, 4 of the top 10 games, including the clear #1, Tetris, a highly profitable $120MM a year business, etc., we were paranoid. About everything. We constantly talked about threats to our business -- direct or indirect, internal or external or orthogonal. In fact, we had a "threat map" to help us visualize our paranoia. And in every area that mattered to our business -- content innovation, distribution, brands, business model -- we tried to develop defensibility and a fall back position in case of disaster. When you are not in control of the platform, you need a resilient business and a Plan B. The rug could be pulled out from under you at any time.

Fascinating Mint Stats

If you don't use Mint, the personal finance site (disclaimer: a Benchmark portfolio company), you should. It's a killer service. Mint provides a simple, powerful, web-based alternative to the bloat-ware that Quicken and Microsoft Money have become as a result of the "feature war" they commenced a decade ago. In this environment, where everybody is taking a second look at personal spending, Mint is a great tool for gaining insight into your finances and patterns of behavior.

Mint CEO Aaron Patzer wrote a guest column for TechCrunch today, providing some recession stats derived from Mint's 900,000 users. It contains some really fascinating data from real people, a counterpoint to the data we're getting about the recession from politicians, TV talking heads, and bankers.

Aaron sees the data revealing a recession that's less dramatic than the "Great Depression 2.0" news reports would have us believe (i.e., 10% spending declines across the board). But it looked pretty bad to me. A couple of grim numbers for consumer companies:

• Entertainment spending down 22%
• Home (services, furnishings, etc.) down 21%
• Travel down 24%
• Cash savings cut in half
• Debt up 10%
  

The gas/fuel decline of 32% isn't as meaningful to me, because it's likely driven more by the decline in gas prices since August than by changes in consumer behavior.

The decline in cash savings -- from roughly $11,200 to $5,500 augurs a much more troubling first half of '09. That number suggests that consumers have been deficit spending to the tune of $700 per month since the recession hit. Once that cash cushion is effectively gone, we could see the current average spending declines of $400-500 per month drop to over $1,000, or closer to 25% across the board. Since expenses like rent, utilities, and food are less susceptible to cuts, that extra $500 or so of reduced spending is going to hit discretionary categories -- entertainment, shopping, travel, dining out.

Whither Open

PocketGamer reported today that Apple will create a "premium" area of the iPhone app store for games priced at $19.99, and will restrict distribution to a "number of large publishers, rather than the thousands of smaller developers currently selling their titles on the main App Store." The move is reportedly to help combat the race to the bottom that I wrote about last summer. To me, it suggests recognition by Apple that there is some benefit to a managed platform.

This is something that the console manufacturers learned after the tidal wave of bad content killed the market in the '80's, resulting in the famous "ET in a landfill" period of the video game business. Nintendo brought the market back with tight gatekeeping of 3rd party publishers and the quality of the content they distributed. Since then, the symbiosis of platform management and marketing combined with publisher quality and standardized economics, produced an order of magnitude greater business opportunity than the more "open" PC gaming platform.

There is an article of faith in the venture community that open eco-systems create more valuable companies, and the example of the internet certainly gives credit to that viewpoint. But, as I've said before, the App Store itself is the "killer app" for iPhone -- the 15,000 apps available on the App Store primarily benefit Apple, rather than any single publisher or developer. It is extremely difficult to build sufficient market share to create enterprise value for a company when there are 20 free, me-too products in every competitive category.

Value Creation & Distribution

I read this interesting piece on Gamasutra today and it motivated me to write about the keynote I gave at the SMU-Guildhall conference on video game law and business earlier this month.

My topic was, broadly, the fallacy in the video game business that content innovation creates enterprise value. By enterprise value, I mean a return on equity for shareholders, usually at some multiple of revenue or earnings. Instead, I argued that while content innovation expands audiences and generates revenues, distribution innovation has historically driven outsized enterprise value creation in the video game business.

Here are my slides -- you can get the idea:

Ok, not that remarkable. I've spoken on this subject twice before -- once to an internal EA audience at their Vancouver online summit a couple of years ago, and I talked at some length on this topic on a panel that Dean Takahashi led at UC Berkeley last year.

But it's amazing how many people didn't get it. One person from a well-known market research firm challenged my thesis, arguing that "shiny disks are still a multi-billion dollar business." Well, so is the grocery business. So is the automobile business. But investors don't ascribe high multiples to those revenues.

Don't believe me? Do the math. THQ is currently trading at a $270MM market cap, despite $1B in trailing twelve month revenues -- .27X. Take Two is at .37X. Even EA is down to 1.22X.

The current valuation multiples in the video game business are predicated on earnings or revenue growth, and that's the context in which content innovation is linked to value creation. Activision gets a bump from Guitar Hero because that franchise supports Wall Street's revenue growth estimates, and because hit titles produce economies of scale that drive better margins and thus earnings growth.

But content innovation rarely produces long-term, defensible competitive advantages in the way that distribution innovation does. When EA created their global direct retail distribution platform in the early 90's -- highly innovative at a time when most of their competitors were still working through aggregators -- they created sales leverage that lasted for a decade, and created a market share and earnings multiple advantage that none of their competitors could match. It wasn't that EA had Madden & FIFA, it was that EA had those titles and could sell them in the four corners of the planet.

Meanwhile, the companies that have recently built innovative digital distribution platforms, often based on virtual goods sales or subscription revenues, are thriving, maintaining buoyant revenue multiples despite the downturn. Shanda, the Chinese MMO company, is trading at a 4X revenue multiple.

Content innovation is sexy. It's spectacular. It's what every editor wants to write about and what every gamer wants to play. But as an investor, you are better served looking for companies that are innovating on distribution.

Americans Abroad

Texan Clint Dempsey has been getting a lot of headlines in England for his good run of form at Fulham, particularly his double against Chelsea which allowed the Cottagers to steal a point in the west London derby. While he didn't seem to be particularly in favor with Fulham's dour coach Roy Hodgson early in the season, now he's a consistent starter and co-leads the team in goals.

However, the big news over the Christmas break was LA Galaxy star Landon Donovan's loan to my favorite team in Germany, Bayern Munich. Donovan joined the team on a tour of the Middle East where they played a few friendlies against local club teams. He scored a goal on the trip and seemed to get a fair amount of playing time.

With the winter break coming to a close, Bayern returned to Germany and played a couple of friendlies against top 2nd division Bundesliga teams Kaiserslautern and Mainz. On Monday against Kaiserslautern, Donovan came on as a sub for Toni after 60 minutes and promptly scored a terrific header (and performed a much subdued celebration from his Galaxy standard):

Then, yesterday against Mainz, Donovan scored the third and fifth goals in a 5-0 Bayern route. Here's his first goal, another superb header:

Bayern starts up the Bundesliga campaign again next Friday against Hamburg. Should be fun to see if Donovan can play at this level. He famously left Germany at the beginning of his career for MLS, seeking the chilled lifestyle of LA, more playing time, and the company of his actress girlfriend over freezing weather and bad food. Interesting to see if he's tempted to stay in Europe this time.