Ask Alyson Hedstrom whether she prefers Microsoft Corp.'s (MSFT) Xbox 360 or Sony Corp.'s (SNE) PlayStation 3, and she just scratches her head. Mention that the shoot-'em-up game Gears of War delivers a rollicking PC gaming experience, and her eyes glaze over. Hedstrom perks up, though, when she talks about a game called Diner Dash, in which she takes on the role of former stockbroker Flo who quits her day job and works to transform a roadside diner into a five-star restaurant.
What may be more surprising is where she plays the game: The 21-year-old student and waitress downloaded it for $7 to her Verizon (VZ) cell phone and fires it up three times a week during her droning 40-minute commute from her home in Boston to work. "I'm definitely not a gamer, but it's fun, easy to relate to, and has a realistic story."
It's customers like Hedstrom who give many of the top companies on this year's IT100 list evidence that big things are happening on the little screen. There's a mad dash among many of those companies to stake a claim in what's being called the Next Big Thing for mobile devices. Games industry researchers forecast that with nearly 2 billion phones capable of playing games by 2010, the industry could rake in as much as $18 billion, topping music ringtones and text messaging. That explains the rush of venture capital into so-called casual gaming companies. And it's why phonemakers such as Nokia (NOK) and Motorola (MOT) are teaming up with chipmakers Texas Instruments (TXN) and Nvidia (NVDA) to create glitzy phones with big color screens and fast processors to make games more interesting to anyone with time on their hands and a phone in the pocket.
But this could also be the year when all the money moving into games gets put to the test. Big companies have become true believers. It's still unclear, though, how much demand there is for pricey games. And telecom giants, meanwhile, charge a pretty penny for entry to the systems.
OUTRACE, OUTGUN, OUTSMART
A flurry of recent dealmaking offers a tantalizing hint of the future for mobile games. Says Larry Shapiro, executive vice-president of Walt Disney Internet Group: "Messaging, chat, and voice communication [in games] really hasn't been done to any significant degree." The Walt Disney Co. (DIS) unit plans to incorporate those features in its games. Like console and PC games, Nokia's snap Mobile aims to create multiplayer game communities where consumers can challenge anyone around the world to outrace, outgun, or outsmart them on the small screen. Game-industry giant Electronic Arts (ERTS) and others envision creating games that unfold like episodes of a television show.
Microsoft Chairman William H. Gates III wants in on the act, as well. Gates spoke in May for the first time at the giant industry video-gaming show, the Electronic Entertainment Expo, to pitch his vision of the software giant's Xbox Live game service on phones. He laid out a strategy in which consumers could start a racing game on the Xbox, continue it on a PC, and use the phone to buy new car parts or pick new colors. "We're going from 'Live' to 'Live Anywhere,"' Gates said. "It's about making gaming attractive to people of every age."
For all the enthusiasm, conquering the industry's challenges isn't as simple as blasting your way through to the next level. Many mobile subscribers around the world have played games like billiards and golf that come with their handsets, but only a tiny fraction—about 4%—actually find a game so compelling they purchase and download it. Despite hundred of millions already spent on creating mobile games in the past year, the top-sellers continue to be old favorites such as Tetris and solitaire and retro hits such as Pac-Man.
Meanwhile, mobile-game development costs are rising as titles use more sophisticated 3D animation. And because there's virtually no standardization of phone software, publishers have to adapt individual games for each phone on the market. Industry experts have said this can add as much as $2,000 for each "port" of a game to a new phone model.
PRICES TOO HIGH?
What's more daunting, the mobile side of the market is essentially controlled by wireless carriers, unlike PC and console games. They provide authentication and billing services and decide which games to highlight and support. Some carriers demand half the take from each download on their network. China, meanwhile, has more than 300 million mobile-game customers, but few software providers make much money because carriers spend almost none of their marketing budget highlighting games.
Researcher M:Metrics Inc. warns that market growth will slow unless things change. "Consumers are not finding games that appeal to them and are complaining that prices are too high," says analyst Paul Goode, vice-president for product development at M:Metrics.
To gain scale and minimize chances that they'll fail, big players are swallowing the small fry. Giants are also teaming up to gain bargaining power with service operators. It's like a corporate game of Pac-Man, but with real money—billions of dollars—at stake.
By Cliff Edwards