Gameloft: Now Playing on the iPhone

Mobile gaming's reigning champ releases six titles in Apple's new iPhone App store, where users can download the fun right to their 3G handsets

A new era for mobile gaming began with the July 10 opening of the iPhone App store, an online catalog of programs for the new 3G iPhone from Apple (AAPL). Consumers are able to browse, download, and install games onto their phones directly, without having to transfer them from a computer—and without paying big airtime fees to operators. And thanks to the iPhone's slick hardware, gamers will benefit from high-definition graphics, tilt control, and a touchscreen interface.

"It will completely change consumers' perceptions of playing on the go," says Michel Guillemot, chief executive and co-founder of Paris-based Gameloft (GLFT.F), which released six iPhone games in the App store July 10.

Thanks to such advances, the market for mobile games is expected to reach $3.7 billion annually in 2012, up from $2.3 billion in 2007, according to Screen Digest, a London-based consultancy. Analysts say no company is in a better position to benefit from that growth than Gameloft, one of the world's top developers of downloadable games for mobile phones.

Lofty Download Numbers

The Paris company sells an average of three games every second all over the world. Its titles are available for 1,200 different handsets, and it has 50 games out of a portfolio of 250 that have sold more than 1 million copies each. Three blockbusters, including Block Breaker Deluxe, have sold more than 10 million units. In addition to the new iPhone games, Gameloft will launch later this month its sixth new title for the N-Gage mobile-games service from Nokia (NOK). And it is in talks to develop games for the new Android mobile operating system spearheaded by Google (GOOG).

Gameloft overtook EA Mobile, a division of Electronics Arts (ERTS) in the fourth quarter of 2007, to become No. 1 globally, says brokerage Natixis Securities (CNAT.PA). Natixis figures Gameloft still looks the best positioned to outpace the market and improve its profitability. The company had 2007 revenues of $150.84 million, up 40% from the previous year. It expects sales to grow another 25% to 30% this year, even though business generated by new platforms such as the iPhone isn't expected to have a major impact on its results until 2009.

The biggest growth driver for Gameloft is the increasing market penetration of mobile phones able to handle multimedia content such as music, movies, and games. Another key factor is growing acceptance among consumers for downloading media into their phones. Today, only about 5% of handset owners ever download anything, but that soon could double to 10% thanks to the emergence of models such as the iPhone and Nokia's high-end Nseries, says Richard Beaudoux, a Natixis analyst based in Paris.

Easier to Buy, Download, and Play

New speedier mobile networks also make it easier to access games and play online against multiple players. Operators have encouraged use of data services by rolling out fixed-price "all you can eat" pricing plans. That means consumers are no longer hit with hefty fees just to download games—not to mention the hours they spend online jousting with rivals over the air.

The Gameloft games sold in the App store, for instance, will sell for a one-off price of just $7.99 to $9.99 in the U.S., €5.99 in Europe, and £3.49 in Britain. Under Apple's business model, game makers keep 70% of that fee, Apple gets 30%, and mobile operators get nothing. That's a better deal for game makers than they were previously getting from mobile operators, who sometimes kept more than 30%.

It's a good deal for consumers, too, analysts say. Most mobile games sold today are fairly small, limited to about 600 kilobytes in size. But thanks to the capacious memory in the iPhone and other multimedia handsets, new games are much larger—ranging from 2 megabytes up to 60MB in size—allowing for rich 3D graphics similar to those on dedicated game consoles. Downloading such huge games would be a nonstarter on pokey networks or if consumers had to pay by the byte.

The iPhone's hardware also makes it easier and more fun to play games while on the move. Gamers can use their fingertips to shoot weapons or answer questions. And thanks to the iPhone's motion-detecting technology, all sorts of new user interactions become possible. When playing a card game, for instance, a player can shuffle the deck by giving the phone a quick shake. In Gameloft's popular Asphalt game, set to be released in the App store later this year, the iPhone itself becomes a steering wheel: Turn it, and the 3D car on the screen moves in tandem.

Competition from EA Mobile

Of course, rivals are also making games for the iPhone. EA Mobile released three titles July 10: Scrabble (which will be available in the U.S. and Canada only) and two puzzle games, EA Sudoku and Tetris. A version of EA's popular Spore will be available to iPhone users in September, when the game launches across all platforms. Sudoku will sell for $9.99, while Scrabble and Tetris cost $14.99 each, EA says. Analysts also expect other vendors, such as Glu Mobile and Sega, to come out with iPhone games.

Still, Gameloft is ahead of the pack because it has been making mobile games longer than just about anyone else (, 10/19/06). In 1986, Guillemot and his four brothers founded Ubisoft Entertainment (UBIP.PA), a leading French videogame developer. In 1999, they spun off Gameloft, which went public in 2001. Today, the company has more than 4,000 employees who work in its studios around the world. It has deals with over 180 operators and 150 affiliates who distribute its titles in more than 80 countries worldwide.

Though Gameloft had a head start in mobile games, EA Mobile jumped to the lead for a while through a series of aggressive acquisitions, including its 2005 purchase of Jamdat. But Gameloft, which has chosen to grow organically, has generated far more original games. Some 53% of its titles are new intellectual property, compared to only 33% for EA Mobile, says Ronan de Renesse, a mobile games analyst at Screen Digest.

Not Overlooking Consoles

This year Gameloft has broadened its business by rolling out games for Apple's iPod and virtual consoles—that is, titles that can be downloaded over the air for devices made by the likes of Microsoft (MSFT) and Nintendo (7974.T). Gameloft's Brain Challenge was the most popular Xbox Live title in the world during the first month it was launched, and Show King remains one of the five most popular games for the Nintendo Wii in Japan, Europe, and the U.S., according to Gonzague de Vallois, Gameloft's Paris-based senior vice president of publishing.

While Ubisoft targets hard-core games, Gameloft's strategy is to make casual games. Analysts think it's a smart move for the company to branch out into consoles and broaden its player base. Why? Today's mobile-phone gamers will likely become the console and PC players of tomorrow, they say. That's because a growing number of people are opting to play simple board-type games on both mobiles and consoles.

Some financial analysts, such as Thomas Langer of German bank WestLB, worry that consumers may respond to the global economic slowdown by postponing game purchases. But others are more optimistic. Natixis Securities, which maintains a buy rating on Gameloft, says it believes the best is yet to come. Guillemot, not surprisingly, agrees. "All the ingredients are now in place to create a huge market and provide users around the world with a very high level of satisfaction," he says. "We believe this will translate into a very profitable business for us."

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