Games – is there a repeatable formula for success in games investing?

I was lucky enough to be on a panel with a bunch of great game companies at an event hosted by Investec. At Index we have probably done as many investments in online games as any other firm in Europe with King.com, Stardoll, Moshi Monsters, Playfish and Betfair.

So a few decent companies and no real flame-outs to speak of…yet But how in an industry which people often classify as “hit-driven” can a VC make a decent return? That’s exactly the question I try to tackle in the following video (links to external site). Thanks to Investec for inviting me to participate and putting on a great event.

iPhone OS 4: The Winners and Losers

One of the most impressive aspects of Apple product launches is that even though the announcements themselves are usually fairly accurately predicted, there is always some element of surprise that remains.

The iPhone OS announcement which followed quickly on from the iPad launch was no exception. Multitasking was a heavily demanded feature and the main competitive weakness of Apple mobile devices versus Android. However the way Apple implemented it was unique and has lots of ramifications on the ecosystem partners.

By mandating that applications write to a multitasking API which is part of the OS, the only background processes which are running are under Apple’s control. While this will require some extra steps from the developers, it seems like a good compromise which will allow Apple to be confident of delivering a good user experience but also retaining a broad ecosystem of developers.

Here’s some of my thoughts on various aspects of the announcement and who the winners and losers will be.

1.  Multitasking – Music

Winners: Pandora, Spotify, Rhapsody, Napster, etc.

Loser: iTunes

Until now only Apple native music applications could run in the background. Other music applications although downloaded in great numbers were at a big disadvantage by only running in the foreground. At the event, Apple presented Pandora as complementary to the iTunes. I don’t think it is or perhaps there is more to this relationship between Pandora and Apple than meets the eye. I’m convinced that people will listen to more streamed music at the expense of downloaded music and by making these services run more smoothly Apple is accelerating the industry towards a future where music is predominantly network based (e.g. Spotify) rather than locally stored. I suspect Apple can see this and will need to own a music streaming service of their own. I think they will build not buy here. Apple always likes to launch a consumer service with a proprietary slant/innovation and you can’t do that if you are just buying a service people are already familiar with.

2.  Multitasking – Voice / Calling

Winners: Rebtel, Skype

Losers: Carriers

Wow, this really can’t have been a popular move with AT&T and the carriers with big iPhone subscriber base. Lack of multitasking for third-party voice services obviously made inbound calling essentially impossible. For IP-based mobile services like Skype and Rebtel (Index investment), enabling multi-tasking is a real godsend. Particularly for international calls and video calling applications I can see people abandon the overpriced tariffs of the mobile operators for third party applications which leverage the phone’s contacts and native calling UI.

3.  Gamecenter

Winners: Small independent App Developers

Losers: Openfeint, Scoreloop, ngmoco’s Plus+ network

The biggest problem however in the iPhone gaming ecosystem is lack of social discovery which was obviously vital to the growth of gaming on Facebook. The other key difference between Facebook and iPhone as gaming platforms is that Facebook is server-based and assumes a permanent connection whereas iPhone games are downloads which are generally designed for offline play or for a play mode where they are only sporadically connected. This makes it much harder to build the “mini-virtual-world” type of game which monetizes so heavily online (e.g. Pet Society, Farmville, Acquarium, Moshi Monsters). While the Apple ecosystem offers lots of games that offer quickfire entertainment, few titles build real emotional connection and engagement with users and hence the monetization per paying user is much lower e.g. $3 bucks versus $30+ LTV for paying users on the leading Facebook games.

The Gamecenter is Apple’s answer to some of these challenges. Apple was pretty fuzzy about what would be released and when but the key elements were a network-based high score table, a “quickmatch” engine for multiplayer gaming and basic social discovery. What they didn’t state was which social graph would power this social discovery. These features are directly competitive with the Openfeint, Scoreloop, Plus+ despite their claims otherwise. Directionally therefore the Gamecenter initiative is a big positive for developers. Will it give rise to a major new player as big as Zynga or Playfish or will these social gaming companies themselves attack the iPhone with more firepower? Watch this space…

That’s already a long post… I’ll call it quits there and well done for getting to the end.

All the best.

VC in 2010 – Video Interview with Unquote Magazine

Many thanks to Rikke Eckhoff for giving me the opportunity to share thoughts and ideas on the Venture Capital industry. Currently to view it, you need to visit the Unquote site HERE. When I get the chance i’ll try and embed it here also.

Big news for me and my family this week was birth of a second child – Henry Lars Holmes. Comments may therefore go unanswered for a while…

The mobile black hole – can VC finally escape?

Happy New Year and what an exciting start to 2010! Already we have seen the acquisition of Quattro by Apple, the launch of the Google-branded and specified Nexus One phone and growing anticipation of an Apple Tablet computer. I wanted to summarise some of my thoughts on what these events may mean for the Venture Capital.

Anyone familiar with the VC industry will know the bulk of positive returns tend to be driven by a fairly concentrated set of investments made by the Venture Capital industry. Often literally a handful of companies can drive the bulk of the entire venture ecosystem return over the course of a decade. Obvious examples over the last few years have been Facebook, Google, Youtube, Skype*, Betfair* and perhaps a few more companies spread over enterprise software, semiconductor and cleantech. Notably absent are any venture-backed businesses which have used the mobile platform as their primary means to establish a multi-billion dollar company. In fact the mobile applications sector has been a virtual black-hole for venture capital. Money poured in, yet between Jamba selling to Verisign in 2004 until the recent exits of Admob and Quattro, examples of good venture-backed exits have been like parrots in the Arctic – that is non-existent.

Why mobile (mostly) sucked for so long for VC?

I would boil it down to four major factors:

1. Operator Channel – Selling products and services to a mobile operator or relying on mobile operators to get applications to market has dire economic consequences for most VC-backed companies. Revenue share is typically exorbitant driving low gross margins. The length of the sales cycle and also the subsequent qualification, testing and implementation burden imposed by operators drives overheads to a level which ultimately can’t be funded.
2. Device Fragmentation – This kills an application or services company for two reasons. Firstly the cost and complexity to build, test and support an application on multiple handsets (which are subsequently configured differently by the operators) is prohibitive. Secondly and less well understood, marketing a service to a fragmented device ecosystem is much harder. In particular viral channels break down where people cannot easily adopt applications and services unless they share exactly the same device as their friends and colleagues. The perception that having a few common operating systems would largely solve this problem is I believe wrong. A standard OS helps, but if factors such as screen size, CPU performance, memory, user input mechanic and sensors (e.g. cameras, tilt-sensors, multi-touch, GPS) even differ slightly across phones running on the same OS, then the application developer still faces a meaningful fragmentation problem. This is particularly true for complex applications such as games. Hence why Google changed course with Android. Originally Google was adamant that Android was their mobile offering and they wouldn’t offer a phone per se. The launch of the Nexus One is I believe driven the realisation that that to build an application ecosystem to rival Apple’s, they need to specify the device as well as the OS or else the fundamental fragmentation problem is not solved.
3. Low smartphone penetration – Until recently, simply not enough phones in circulation had the screen size, CPU, browsing ability etc. to provide an audience large enough to build a big mobile application company around.
4. Consumer confusion over mobile data tariffs – The emergence of flat-rate plans played a key role in the initial phase of consumer internet adoption on the PC (e.g. Freeserve in the UK). Before these emerged people were nervous and unsure of what costs would be incurred when logging on. Mobile flat-rate plans are now widely available and bundled with most Smartphone purchases, although some areas such as international roaming can still spring nasty surprises on consumers.

As a result of these factors, Index Ventures over the last few years made relatively few investments in the mobile area and those that we did such as Rebtel* had business models which we believed specifically avoided the pitfalls outlined above.

Now however after 10 years of false dawns and frustration, the next few years could be very exciting and highly rewarding for VCs who place the right bets. Firstly almost all the issues listed above have now been largely eroded, at least in the high-end smartphone sector. While this still accounts for a small portion of the overall market, it is growing the fastest and is the most profitable sector. Apple alone may account for as much as 50% of all handset industry profits despite having one phone model (thanks Hussein.)

Another critical factor which will drive better VC returns is the very aggressive turf war that is now playing out:

• Apple will want to extend its iPhone dominance as the high-end smartphone sector moves into the broader mass market;
• Google needs to ensure its dominant position in the web advertising is preserved and extended as consumers increasingly access the internet from mobile devices;
• Operators will try to dress themselves up as anything other than the dumb-pipes they seem destined to become;
• Nokia, Motorola, Samsung and other handset makers will need to decide how to fight more convincingly in the handset sector or whether to retrench to low-end phones or developing markets;
• Facebook, eBay, Amazon and other web players will also need to invest in providing existing web customers with new and better services which leverage the mobile platform;

Which will mean acquisitions – Admob (Google), Quattro (Apple), and Jajah (Telefonica) will be just the beginning. I will get as involved as I can in finding great companies to invest in in this sector. Good luck to everyone for 2010!

*Current or past Index Ventures investments.