Wireless Gaming: Finally No Fantasy

As handset hardware and networks improve, carriers see cell-phone fun as the Next Big Thing for firing up subscribers' spending

Ever since the idea occurred to some programming whiz, wireless online gaming has looked like one of those goofy Internet fantasies that was just too far ahead of its time. For years, cell-phone owners had to satisfy themselves with Snake, an amoebic version of the two decade-old Pac-Man electronic game, in which a line devours tiny dots on a phone's screen. In fact, Snake remained state-of-the-art even after Nextel (NXTL ), which now has 10 million subscribers, introduced the first Java-based phones nearly two years ago.

Suddenly, however, the technology of wireless gaming is catching up with the concept, and carriers, phone makers, and game developers are jumping onto the bandwagon. Phones with large color screens more suitable for gaming began selling in the U.S. last year. Since then, carriers have also developed back-end systems flexible enough to bill for individual games. And starting last fall, most cell-phone networks became fast enough for games to function well.


  Wireless gaming's potential shows up in the names of the players who are finally moving in. Big-time game developers Sega (SEGNY ) and Activision (ATVI ) have recently launched wireless titles. Thus, subscribers to No. 4 wireless service provider Sprint PCS (PCS ) can now play Sega's Monkey Ball, in which a human guides a monkey through colorful obstacle courses.

Carriers are adding dozens of new games each month, and handset makers are rolling out new toys for the wireless crowd: On Feb. 5, No. 1 cell-phone maker Nokia (NOK ) will introduce the first wireless gaming console, called N-Gage, which is also a cell phone and will appear in stores later this year. "We see [wireless] gaming as a huge opportunity," says Nada Usina, general manager and director of media entertainment for Nokia in North and South America. Indeed, at the recent Consumer Electronics Show in Las Vegas, Microsoft (MSFT ) Chairman Bill Gates predicted that his company could one day build a wireless gaming console to go with its Xbox system.

Cell phones, however, are where the action -- and profits, likely -- will be first. This year, No. 2 mobile-phone maker Motorola (MOT ) will debut several models that allow users to press multiple keys simultaneously -- a must-have for action play. Today, that's available on only one Motorola phone -- the A830, which retails in Europe for $1,172 and up. Manufacturers such as Samsung are designing their phones to play music or vibrate whenever a player makes a good or bad shot in a game. And all phone makers are offering more embedded games as teasers for the good stuff that's online. A year ago, only 20% of the phones Motorola shipped came with high-quality games. This year, it should reach 80%, says Alberto Moriondo, its director of global entertainment services.


  Turns out, the handset makers' main clients -- carriers who resell the phones or give them away with service plans -- are becoming more apt to buy models that have at least some gaming capabilities. They're also more likely to feature such models in their ads, says Moriondo.

Game publishers are benefiting from this trend as well. Last October, Activision offered its Tony Hawk Skater 4 game, in which players guide a skateboarder through an obstacle course, to No. 3 carrier AT&T Wireless (AWE ) exclusively for six months. In return, AT&T Wireless featured the game in its newspaper and radio ads. As a result, Tony Hawk became the most popular game on the AT&T Wireless network, says David Anderson, Activision's director of business development and licensing.

The service providers are on board because the market for voice calls has matured, and average monthly revenue per customer has turned stagnant. Carriers hope that gaming will help reignite growth -- and signs that it might are starting to appear. Already, games are by far the most popular type of paid, downloadable content for Nextel and AT&T Wireless, which has been offering the Java-based phones required for such gaming for less than three months.


  Gaming should contribute "significant revenue" by yearend, says Scott Edison, manager of business development at AT&T Wireless. Other carriers seem as optimistic: "Very soon, the mass market is going to wonder what they did before [wireless gaming was around]," predicts Jeff Hallock, director of consumer marketing in Sprint PCS' wireless division.

Plenty of revenue will likely be available to share for outfits that can afford to hang around for awhile. The number of wireless gamers in the U.S. should reach 19.6 million by yearend -- and 112.4 million by 2007, according to tech consultancy IDC. Gaming revenues should grow dramatically as well, it predicts. Total hardware, software, and services sales will probably hit $4 billion, from $366 million, over the same period, estimates IDC analyst Shelley Olhava. That would be impressive, considering that the market for home gaming consoles reached only $9.4 billion in 2002 -- after years of intensive marketing. And gaming consoles sell for $200, vs. just $3 to $7 per wireless game.

Still, wireless gaming has to clear many hurdles to become a money-making machine. Handset makers and carriers have to sort out who'll control the direct -- and highly profitable -- relationships with game developers, publishers, and consumers. And wireless networks have to improve further to allow for the smooth, interactive experience users have come to expect, thanks to offline gaming.


  Indeed, poor network quality may be the biggest challenge. Today, many cell-phone customers can play puzzles or action games on their handsets. But it's the multiplayer games that carriers want to flourish -- and drive up usage and revenues. At the moment, such play is inhibited by the same dead zones that can interrupt calls -- and drive a gamer to distraction in mid-play. Transmission delays are also common -- and can distort torrid competition. Nonetheless, Nextel is undaunted, and within the next month should introduce Fox Sports On-Field Live Football, which will let users compete over the wireless network.

In the North American market, gaming devices such as N-Gage will encounter another difficulty: Lack of technology and design standards. Unlike European carriers, which have built their networks around GSM (global system for mobile communications) technology, U.S. carriers use several different network standards. N-Gage works on only GSM. Since AT&T Wireless uses GSM, its subscribers should be able to use the device, but a Sprint PCS user won't.

Another issue is the lack of standards in phone design. Today, most cell phones have different-size screens and are based on diverse cell-phone operating systems, as the basic software is called. As a result, Sega has to make 15 versions of each game to reach the entire U.S. market, says Jennifer Walters, director of marketing and communications for Sega.com. That's a headache -- and expensive, too.


  In addition, for wireless gaming to enter the mass market, hardware prices have to come down, says Joe Laszlo, an analyst with marketing consultancy Jupiter Research. Today, most phones with color screens cost hundreds of dollars, a figure that has to drop to less than $100 for online gaming to take off. N-Gage will almost certainly cost more than regular gaming consoles such as Microsoft's XBox, Sony's PlayStation 2, or Nintendo's GameCube.

The problem with that, according to a June, 2002, Jupiter survey of 2,551 gamers, is that cost is their top priority. To succeed, Laszlo adds, N-Gage, whose price Nokia plans to announce on Feb. 5, will have to sell for less than $200.

Even at that cost, N-Gage will face fierce competition from the $69 Game Boy Advance and a new $99 Game Boy SP, both from Nintendo, which holds a 98% share of the current handheld gaming market. Nintendo isn't worried, however, because wireless gaming "isn't something Nintendo thinks is a mass-consumer market," says Perrin Kaplan, the company's vice-president for corporate affairs.


  Finally, carriers and cell-phone makers still have to figure out who'll be the intermediary between game developers and end users. Cell-phone carriers want to license games, sell access to them to their subscribers, and pocket the revenue. By contrast Nokia, which has said it will publish games for N-Gage itself, wants to persuade carriers to let it sell games directly to their consumers in exchange for a share of the revenues. That would likely be less lucrative for the carriers, which would probably resist. Edison of AT&T Wireless says his company isn't likely to agree to Nokia's terms anytime soon.

Arriving at a compromise could take awhile. But so far most carriers and cell-phone makers have been encouraged by the market's ramp up. "For us, it's full speed ahead," says Sprint's Hallock. The carrot is there, dangling for all to see. Now, it's just a matter of figuring out how to grab it.

By Olga Kharif in Portland, Ore.

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