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Zeebo Takes Wireless Gaming to Emerging Markets

Reinaldo Normand is terrible at remembering dates, but Feb. 17, 2006, is one he won't easily forget. That afternoon he was chatting with colleagues during a break at the downtown São Paulo offices of Tectoy, a Brazilian gaming and electronics company, when an idea popped into his head. What if he were to make a living-room gaming console for emerging markets that would connect to the Internet over wireless phone networks and sell at prices middle-class families could afford? In Brazil, the choices weren't great: Consumers could pay $150 for a 20-year-old Sega (6460.T) console, $250 for a pirated version of Sony's (SNE) nine-year-old PlayStation 2, or $1,000 for the latest Xbox 360 made by Microsoft (MSFT).

Normand, who was then in Tectoy's mobile video games business, admits it was a crazy thought. In the $50 billion global video game industry, Sony, Microsoft, and Nintendo dominate the console market. They have spent billions of dollars developing the technology and marketing the machines and games that go with them. Their brands are well known globally. It would be financial suicide for a no-name with no money to take on such formidable tech giants.

But a half-hour later, Normand called his boss, Stefano Arnhold, who was traveling in Europe on a business trip. "I told him, 'We need to do this,'" Normand recalls. "'This will be a billion-dollar company. We need to find investors in America.'"

Multimillion-Dollar Investment

A day after Normand's epiphany, Mike Yuen was at his office in San Diego, writing up a business idea that bore similarities to Normand's. As a manager in the gaming division at mobile-phone chipmaker Qualcomm (QCOM), Yuen had often heard developers complain that playing games on the tiny screens of mobile phones was an unsatisfying experience. He was determined to do something about it.

Two men, separated by nearly 9,500 kilometers (5,900 miles), with a similar hunch. Normand would soon close the distance. He searched on Google for several U.S. chip companies' e-mail addresses and phone numbers. Months later, with help from a Qualcomm employee in Brazil, Normand found himself sitting across from Yuen in mid-2006, pitching a version of his idea. By March 2008, Qualcomm agreed to a multimillion-dollar investment in Normand's venture. "I realized the scope of what Reinaldo was planning and how similar it was to a concept I had been working on internally within Qualcomm," says Yuen, who is senior director of games and services.

On June 1, Qualcomm and Normand's venture, Zeebo, will begin selling their $240 console—also called Zeebo—in Brazil's second-largest city, Rio de Janeiro. About the size of a paperback book, the machine will run on a Qualcomm phone chip and download games from an online store. Each console will have three games pre-installed. The only way to get more games will be to buy them online and save them on the console. "The iPhone was our model," says Normand, Zeebo's founder and vice-president for development.

By September, the Zeebo is expected to hit stores in São Paulo and Mexico City, and next year it will be available in other Latin American countries as well as India. China and Russia could be added later. "We would be pleased with hundreds of thousands of units sold this year and millions sold next year," says John Rizzo, Zeebo's chief executive.

Tight Market

A global recession isn't an ideal time to launch a new gaming machine. Lately, growth has been harder to come by for the gaming industry. This year, market researcher iSuppli predicts that global gaming consoles sales could gain a mere 1.4%, to 56.1 million, from 55.3 million in 2008—the smallest uptick in years—and then decline in 2010.

But Qualcomm and Zeebo think there's plenty of pent-up demand in emerging markets for what they're offering. Many analysts are optimistic about the Zeebo's prospects. "The Zeebo has the potential to be well received as a great, affordable alternative," says iSuppli gaming analyst Pamela Tufegdzic.

Among the would-be buyers Qualcomm and Zeebo are targeting: the 1 billion consumers living in Brazil, China, India, and parts of Eastern Europe, Asia, and Africa, whose rising incomes and savings put them in a group marketers have dubbed the "next billion." A 2007 study by Boston Consulting Group estimated that these consumers spend $1 trillion annually but remain the largest untapped consumer segment globally. In Brazil, an estimated 34 million of the country's 53 million households belong to this group; in India, there about 90 million households (roughly 450 million people), according to BCG.

Qualcomm has a lot riding on the Zeebo's success. The company created the so-called Code-Division Multiple-Access (CDMA) technology for cell phones. But lately, rival technologies have been gaining market share, and handset makers have pressured Qualcomm to lower the royalty fees it charges for others to use its patented technology. The company's best hope for future growth is to apply its wireless technology to new areas such as appliances and other electronics gizmos around the home, like the Zeebo.

Uphill Climb

But selling a gaming console isn't for the faint of heart. Because of the huge up-front costs of developing a console, most console makers rack up losses for years before they ever turn a profit. What's more, a console is only as attractive as the games that software companies create for it, which is why so many consoles flop. So far no manufacturer has established much of a presence in the emerging markets on the scale that Zeebo is talking about. Even Sony, Microsoft, and Nintendo (7974.T), which sell millions of machines a year in the U.S., Japan, and Europe, ship just tens of thousands of units to all other markets combined.

Yuen and Normand say they have no illusions that the Zeebo's technology will measure up to the Xbox 360, PlayStation 3, and Wii. Their top priority was to enter an unclaimed market without having to spend the huge sums that console manufacturers typically have. Even so, to lure software developers, Qualcomm has been offering financial help—and may need to dole out more to attract the big-name developers. Normand recently flew to Tokyo and Osaka to enlist more Japanese game creators. "Will they keep any level of [software] development going if the sales numbers aren't good?" asks David MacQueen of Strategy Analytics in Newton, Mass.

Qualcomm and Zeebo's bet is that their target audience of kids and casual gamers in emerging markets will put price and convenience first. But they won't be alone for long. "I know the Big Three are definitely looking at these markets," says NPD's gaming analyst Anita Frazier.

Still, it will be hard for rivals to beat Zeebo games on price. They're expected to cost around $10 each. The reason: Games will be made with BREW, a mobile-gaming software format that's been around since 2001. Gaming executives say they can create BREW games for a few hundred thousand dollars. For an investment in new markets, that's a steal, especially when compared with the multimillion-dollar budgets of blockbuster titles. And since everything is sold online, there are virtually no production, packaging, or distribution costs. "Over-the-air and digital downloads means there are no inventory issues and that inventory is unlimited," says Scott Rubin, Namco Networks America's senior vice-president for sales and marketing.

Manufactured Locally

Brazil would seem a good place to start. Its video game market is small, and import tariffs can make the latest consoles—which go for as much as $1,000—and games too pricey for anyone but the wealthiest consumers. The Zeebo will cost more than pirated machines but less than almost anything else. To avoid import duties, Qualcomm will have local manufacturers build the consoles. The $240 price is even more affordable because of the way most consumers will pay for them: in installments lasting up to 20 months.

Its main competition will be the $150 Sega Genesis, which was released in 1988, or pirated consoles. Along a shopping strip called 25 de Marco, vendors hawk pirated Xbox 360s for around $200 and games for $5 to $10; older pirated machines, such as the PlayStation 2, are even cheaper but tend to conk out quickly. (That's also true in other Latin American countries as well as India and Russia.)

Analysts say the Zeebo's wireless technology offers protection against would-be counterfeiters. When Zeebo owners buy games, the data are stored in the console's flash memory along with a digital signature that prevents copying. That's a relief for game developers. Sony, Microsoft, and Nintendo have shied away from emerging markets mainly because of piracy, says Billy Pidgeon of New York's Game Changer Research. With the Zeebo, "you're providing content over the air, so that takes piracy away because you can't grab it and put it onto digital media," says Pidgeon. In extreme cases, Qualcomm could ask wireless operators to cut off service, or remotely wipe out the games stored inside.

The Zeebo team took just three years to go from concept to console—a remarkable feat. What makes it even more astonishing is that Normand's venture wasn't the type that Qualcomm normally would invest in. Normand was still working for Tectoy, and his startup, which later became Zeebo, had no management, no product, and zero revenues.

Simple and Inexpensive Prototype

Normand, who is 33 and calls himself "a dreamer," might still be shopping around if it hadn't been for Yuen. Soon after they met, Yuen, a fast-talking 44-year-old Californian who prefers jeans and T-shirts to the khaki pants and button-downs of his colleagues, won Qualcomm's annual venture contest by beating nearly 500 competitors for the chance at seed funding. As part of his presentation, Yuen had an engineer, Dave Durnil, build a prototype from a cell-phone chip, a standard game controller, and an empty hard-disk drive case purchased at Fry's Home Electronics store. That proved how simple and inexpensive the console was to make and that it could be done without fancy new technology. "We got a lot of encouragement from Paul [Jacobs]," Qualcomm's CEO, Yuen says.

But a console is only as good as its games. In early 2008, with Qualcomm's blessing, Yuen and Normand started recruiting developers. Just before the Game Developers Conference in San Francisco, Yuen sent e-mails to dozens of his contacts asking if they would meet to discuss a "special project." To keep a low profile, his team held meetings on the fly in the hotel lobby and near the escalators inside the conference center. "We had PowerPoint slides but no prototype or working anything," recalls Yuen. Over the next few months, they landed some big names: Electronic Arts (ERTS), THQ (THQI), Activision-Blizzard (ATVI), Namco Networks (7832.T), Capcom (9697.T), and PopCap.

Even before they had a console or a contract with a wireless carrier, the Zeebo team set an ambitious launch date: Children's Day on Oct. 12, in time for the yearend holidays. Normand worked his contacts at Claro, Brazil's second-biggest wireless operator (controlled by Mexican wireless giant AmÉrica Móvil (AMX)). To help with the business side of things, Qualcomm hired John Rizzo, a Silicon Valley entrepreneur. Rizzo rented an office for Zeebo's five employees about 200 meters down the street from Qualcomm's headquarters.

But as the October deadline approached, Yuen and Normand's team had to make a tough decision. The console was ready but only 6 of the 15 games would be finished on time. Rizzo, Yuen, and Normand felt they didn't have enough games. So they delayed the launch until mid-2009. "We deliberately decided that because we had one chance to make a great first impression," says Rizzo. When the Zeebo is finally released, there will be a dozen games for sale—including FIFA Soccer and Resident Evil 4—and nearly 20 more by September. (By comparison, Nintendo's Wii had about 20 games.)

Setting the Blogosphere Abuzz

There were other benefits to pushing back the launch date. It gave the Zeebo team more time for marketing and testing. In early March, they sent out a few hundred machines to volunteer testers, who alerted them about a bug in the console's operating software. They fixed the bug and tweaked the menus to make them easier to use. When they unveiled the Zeebo at this year's Game Developers Conference in March, it set the blogosphere abuzz. Within weeks, Zeebo's offices were inundated with requests from about 1,000 developers in Brazil alone.

Ultimately, Yuen thinks the Zeebo's potential goes beyond gaming. The machine has a USB port and can double as a wireless data modem for a computer to link to the Internet. That's key in emerging markets where consumers can often surf the Net from a mobile device but don't have a broadband connection at home. It also means marketers might go through the Zeebo to reach consumers with an array of videos, music, e-commerce services, and even educational programs. Says Yuen: "A lot of the people we're going after don't own a PC or a laptop. If we could be the first set-top box in the home, who's to say we couldn't offer all these other things?"

Hall is BusinessWeek's technology correspondent in Tokyo.

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