A global recession isn't the best time to launch a video game console. Market researcher iSuppli predicts that unit sales of gaming consoles will rise a mere 1.4% globally this year, to 56.1 million—the smallest uptick in years—and then decline in 2010. On top of that, the $50 billion industry is dominated by a trio of powerhouses ready to stomp any newcomer.
Mobile-phone chipmaker Qualcomm (QCOM) and startup Zeebo don't seem bothered. The two San Diego companies think there's plenty of pent-up demand in emerging markets for something new: a living-room console that downloads video games over fast 3G cell-phone networks. They released just such a device—also called Zeebo—in early June in Rio de Janeiro.
The partners are targeting a group that marketers dub the "next billion." These consumers live in developing nations, have rising incomes and modest savings, and together spend $1 trillion annually. A study by Boston Consulting Group estimates that 34 million of Brazil's 53 million households belong in this category, while India has close to 90 million households in this nascent middle class.
Qualcomm has more at stake than the several million dollars it invested in Zeebo in early 2008. Qualcomm created the CDMA technology for cell phones. But lately rivals 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 growth is to apply its wireless technology to appliances such as Zeebo and other electronic gizmos around the home.
Zeebo plans to sell its machines throughout Brazil by September, Mexico by October, and other Latin American countries and India sometime next year. China and Russia could come later. "We would be pleased with hundreds of thousands of units sold this year and millions sold next year," says Zeebo Chief Executive John Rizzo. That seems ambitious. So far no gaming company has sold anywhere close to that many machines in emerging markets. While Sony (SNE), Microsoft (MSFT), and Nintendo (NTDOY) ship millions of units to the U.S., Japan, and Europe annually, sales come to only tens of thousands everywhere else. At $240, moreover, the machine looks priced beyond the reach of most of its intended audience.
Actually, Zeebo is relatively cheap. While U.S. consumers can pick up a new Xbox 360 console for $300, the Microsoft product can cost $1,000 in Brazil after import tariffs are added. (Pirated consoles fetch $250 or so.) Zeebo gets around the taxes because it's manufactured locally. And to make their device more affordable, Qualcomm and Zeebo offer monthly payment plans.
Games cost around $10 and can be downloaded only from Zeebo's online store, akin to getting a program from Apple's (AAPL) App Store. "The iPhone was our model," says Reinaldo Normand, vice-president for development, who founded Zeebo after working at Tectoy, a Brazilian gaming company.
Zeebo also offers wireless connectivity to the Internet where few homes have the broadband lines required for most downloads. Zeebo's technology has another plus: Its downloads come with a digital lock that prevents users from copying and sharing games, a big problem for gaming companies in developing countries. "The Zeebo has the potential to be well-received as a great, affordable alternative," says iSuppli gaming analyst Pamela Tufegdzic.Click to view a slide show of the 20 best-selling video games of all time.