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iSwifter, the company that can stream Flash-based Facebook games so they can be played on the iPad, said that users have downloaded the iSwifter app more than half a million times since the launch of version 3.0 in June and (updated) version 4.0 more recently.

That’s a strong start for a technology that circumvents Apple’s walled garden on the iPad, allowing Facebook and other Flash content to run properly on the tablet. Normally, Adobe Flash games (which are ubiquitous on the web) don’t run on Apple’s iPad, thanks to a technical dispute between the companies. But after a period of negotiation with Apple, iSwifter made it impossible possible with the launch of version 3.0 of its app, which comes with a subscription-based game browser.

iSwifter executes games on its own servers and then streams images to a user’s iPad in the form of a video. The execution is so quick, the user never knows the game is running in a server, not on the iPad itself.

Peter Relan, chairman of Youweb — the incubator that owns iSwifter — is making the announcement today at the GamesBeat 2011 conference in San Francisco. 500,000 people are playing nearly 2,000 Facebook games available on the iSwifter game browser. About 40 percent of all gaming time on iSwifter is spent on Zynga games. This shows that users are not waiting for Zynga and other Facebook game makers to adapt their games to run on the iPad.

That’s an interesting notion, Relan says, because the company charges a subscription fee for iSwifter. Zynga games, meanwhile, are free-to-play. That is, users play them for free and pay real money for virtual goods. But with iSwifter, Zynga players are actually willing to pay money so they can play Zynga games on the go on an iPad. About 20 percent of iSwifter users are willing to pay using in-app purchases to get access to a Facebook game on the iPad. And iSwifter users spent nearly 2 million minutes on Facebook games in the past few months (using earlier versions of iSwifter).

The most popular Facebook games on iSwifter are Zynga’s CityVille and Empires & Allies. Other top 10 games include FrontierVille, Dragons of Atlantis, Gardens of Tim, Backyard Monsters and SlotoMania.

iSwifter CEO Rajat Gupta said the company’s success shows that disruption is occurring in mobile games, where portals such as iSwifter, making it harder for social game publishers to lock their customers on certain platforms.

“While we hear the Facebook app for the iPad is coming soon, we know it won’t include the ability to play games,” said Gupta. “Almost all the big games on Facebook are built in Flash, which doesn’t run on iOS. But iSwifter has created a large following of paying users who love playing Facebook games on their iPads.”

With iSwifter’s game-browser app, iPad users can log into online games like World of Warcraft or play social games such as CityVille on their iPads, even though those games aren’t playable on Apple’s device in any other way.

Users can get the iSwifter app with a regular web browser that can play Flash videos and other web content on an iPad for a subscription of $4.99 a month a flat fee of $4.99 Both deliver Flash and game content — including any social games or massively multiplayer online games.

The first couple of versions of iSwifter let users to watch videos and play a limited number of Flash games on an iPad. But version 3.0 allows you to log into Facebook and play a variety of Flash-based games such as FarmVille, Gupta said in an interview.

Apple approved the previous versions of iSwifter without much interchange. But the 3.0 approval process was lengthier and tougher because iSwifter introduced a new monetization feature. Gupta said he wanted to launch a subscription service where a user would sign up once for iSwifter and the subscription would automatically renew at the end of each month. But Apple balked and required that iSwifter’s users approve the subscription at the end of every month. That way, users won’t get surprised by monthly bills. It isn’t exactly clear why Apple required this restriction for iSwifter, but Gupta said he had to go along. Now, to reduce confusion, iSwifter has eliminated the subscriptions in favor of a single download fee. With version 4.0, users can download it for free and play it for a half hour. If they like it, they can pay the flat fee.

When you load the app, you have two options. You can browse web sites or play games. With the web sites, you can choose from one of the featured links or just type in the web address to go to any web site. For games, there is one game that is available for free each week. The others are available as free-to-play games. After a couple of minutes of playing, the user is prompted to make an in-app purchase to continue playing. If there is a drawback to iSwifter, it is that it needs a constant Wi-Fi connection in order to run, as the video has to be streamed in near real-time to create a continuous and good experience for the user. Gupta says that the amount of bandwidth required to support the app isn’t huge.

Gupta says that iSwifter would be useful on Android systems as well, even though Flash is going to be available on those devices. That’s because all of the capabilities of Flash aren’t available on those devices. Right now, iSwifter runs on just the iPad.

It’s worth noting that many Flash web sites are written for PCs and need a mouse and keyboard. That means they won’t work well on a mobile device unless they are redone in a touchscreen-friendly way. But iSwifter has built software — an abstraction layer built into the cloud platform — that captures a user’s touch-based gestures and converts them into mouse and keyboard-style inputs that Flash games can understand. That conversion is done in real-time.

Developers who have free-to-play games may be particularly interested in making their games accessible via iSwifter 4.0. That’s because iSwifter can extend distribution for the web-based games to the Apple platform. If users buy virtual goods in those games, the developers can make money from the purchases. Apple still gets paid, meanwhile, because it gets 30 percent of the revenue from subscription fees generated by iSwifter, per Apple’s business rules.

The iSwifter browser competes with the Skyfire browser, which costs $4.99 on the iPad. But the Skyfire browser isn’t really built to handle games or Flash animations, particularly since it can’t convert finger touches into mouse clicks.

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Mobile gaming is the wide-open battleground of the entertainment industry. While Zynga dominates social games and big publishers rule console games, the global smartphone game market is still up for grabs.

Since there are potentially billions of users in this market, mobile gaming could become the largest game market of them all. Who will win it?

Smartphone games have been growing as a market since 2007, when Apple’s iPhone debuted. Tablet games have been growing since the spring of 2010, when Apple launched the iPad. Now the fastest-growing mobile market is based on devices running the Android operating system. With triggering events such as the success of Angry Birds, the hit Rovio game that has been downloaded more than 200 million times, mobile game companies are raising tens of millions of dollars. Mobile game companies have garnered significant valuations, particularly overseas.

Tim Merel, managing director at Digi-Capital, says, “The time to act is now.”

The potential of mobile games

Mobile games could be a $13 billion market in 2014, according to Merel. Mobile and online games together could be a $44 billion market, or 50 percent of the global $87 billion market in 2014. Today, mobile games are around $8 billion, a small slice of the overall game market, which is still dominated by console games, web games, and Facebook games. (IDC estimates mobile games will grow to $5 billion in a few years; Gartner says that mobile gaming was $6.7 billion, or 10 percent of the $67.4 billion game market in 2010; the estimates vary, but few doubt mobile games will have a great growth rate).

How will a huge mobile game market come about? That’s one of the questions we’ll explore at GamesBeat 2011 on Tuesday and Wednesday at the Palace Hotel in San Francisco. We’ve got 80 of the game industry’s finest minds focused on the evolution of mobile gaming. We all want to figure out how to connect the dots in mobile games.

Backlash to the hype

The cynics among us shudder at the hype. Some companies that dove in too early found there wasn’t enough water in the swimming pool. That is, the ecosystem hasn’t been fully mature in the past. It’s a market where lots of companies have tried to succeed, but very few can claim successes. For every Angry Birds, there are thousands of failures. The tale has been similar for other gaming bubbles in virtual worlds, feature cell phone games, and casual web games.

Mobile gaming nirvana isn’t here yet. Platform owners such as Apple have made changes that have disrupted the businesses of game makers, such as when Apple recently banned certain incentives for marketing games. The Android ecosystem is fragmented and not as mature when it comes to making money. And other platforms are still fairly weak in terms of a proven ability to generate revenues.

Still, it would be foolish for game companies to avoid investing in mobile games, for fear that they might get more scars. Those who invest and fail and learn are the ones that get ahead. There was a lot of chaos and friction in the early days of Facebook as well. But that eventually turned into a solid platform for making money. The mobile ecosystem is maturing as well. There is plenty of evidence to point to progress on this front. It always takes a few years of trial and error before an investment pays off.

Nintendo and Sony once ruled mobile games via devices such as the Nintendo DS and the PlayStation Portable. But Apple has busted the market open with more than 200 million iOS devices sold since 2007. There are more than 425,000 iPhone apps and 100,000 native iPad apps that have been downloaded more than 15 billion times. That shows that the barriers to entry in mobile games have been lowered so that almost anyone can enter. Small developers such as Dave Castelnuovo’s Bolt Creative — maker of Pocket God — have sold millions of units. Big hits have emerged such as Tiny Wings, Talking Friends, Angry Birds, Infinity Blade and other titles. Apple has paid $2.5 billion to its developers to date.

But the competition is also nightmarish. The average revenue per app is about $5,882. That’s not enough to support the huge ecosystem of developers chasing the market, let alone big companies. Nintendo CEO Satoru Iwata (pictured holding the Nintendo 3DS) said in March that the presence of so much free and $1 software (the average mobile game price is $1.05) in the smartphone games market isn’t healthy and is a primary reason Nintendo is avoiding the market.

Trip Hawkins (pictured right), chief executive of Digital Chocolate, has also warned that the glut of games on the smartphone platforms means game developers will find it hard to make money, noting that the average revenue per game doesn’t even pay for a really good foosball table. Too much junk can ruin the market for everyone and make it hard for consumers to find the good games, resulting in a lot of bad experiences in mobile games. Today, there are 64,048 games on the App Store, including 291 new ones a day. The cost of making these games is in the tens of thousands or hundreds of thousands of dollars, a lot less than the multimillion-dollar console game budgets.

Making the right and wrong choices

By comparison, Zynga is bringing in $235 million per quarter with a base of 232 million monthly active users for its Facebook games. With 600 million users, Facebook is a smaller market than the worldwide mobile phone market. The land grab in social games took place from 2007 to 2009. The result is that Zynga has more users on Facebook than the next 15 rivals. That has positioned the company to go public, raising $1 billion or more in an offering that is expected to value Zynga at $20 billion.

That is how the market rewards companies that pioneer a new market in games and come to dominate it — at the right time. Will the same thing happen again in mobile? Social Gaming Network, which once looked more promising than Zynga in both social games and mobile games, shifted into iPhone games early on, abandoning Facebook games. That turned out to be the wrong move. MindJolt recently acquired SGN for an undisclosed price, but SGN was definitely far less valuable than Zynga by the time it sold out.

The interesting thing here is that Facebook has crushed a lot of its competition. Now both Facebook and Zynga are reaping the rewards. With mobile, Apple faces a bruising fight with Android, which has begun to win the race in terms of numbers of phone activations. The fierce competition is driving the mobile market forward at a faster pace, and that should result in a faster growing mobile games market. Android app downloads have crossed 5 billion, and there are about 40,000 games on Android now. The result is a spiral of competition, where Android and Apple are propelling each other forward at faster and faster rates.

At some point, the numbers game won’t matter. The platform that wins won’t be the one with the most apps. It will be the one with the most retention of users and the most engagement. As Bing Gordon, a partner at Kleiner Perkins Caufield & Byers, said at our last DiscoveryBeat conference, a developer’s job is not to get a first date, or a second date with a gamer. It is to get an anniversary.

The necessity of investing in the future

Some companies have invested a lot of money early to be out front in this fight. Electronic Arts bought Jamdat, a maker of games for feature cell phones, for $680 million in 2005. It used that position to ready itself for an even bigger mobile game market with the debut of smartphone games. EA now has some of the biggest grossing iPhone apps of all time, including Tetris, which has had more than 132 million paid downloads to date.

Other players that have made big investments include Gameloft, Rovio (it made 52 mobile games before Angry Birds took off), Ngmoco, Digital Chocolate, PopCap Games, Glu Mobile, GameHouse, Capcom, and Disney Mobile. Successful startups in mobile include Storm8, Pocket Gems, TinyCo, Craneball Studios, Gameview Studios (part of DeNA), Sunstorm Interactive, Backflip Studios and Outfit7.

John Carmack, one of the world’s greatest graphics experts and game designers, says that it is unquestionable that mobile gaming technology will surpass the current consoles within two years.

Distribution and discovery matter

These companies are building up user bases that can become distribution networks for future games. Recognizing that it has distribution power, TinyCo has started a $5 million fund to invest in small developers to help them launch their games. Why would a game company raise $18 million and turn around and invest $5 million in others? It is leveraging its newfound distribution power.

The distribution power is what the game developers need in order to stand out from the nightmarish competition. How to get your game discovered in a sea of content is still an unsolved problem. The problem of discovery gave rise to mobile social networks such as OpenFeint, which offer tools to socialize a game with achievements, leaderboards, and friend competitions. In Japan, DeNA became a billion-dollar company because tens of millions of Japanese phone users used DeNA’s Mobage network to find games.

But in the U.S., the mobile social networks have not yet become billion-dollar companies. Still, the potential is there. That is why DeNA, benefiting from its strong base in Japan, was able to buy Ngmoco for $403 million. That seemed like an extravagant price to pay for Ngmoco, but DeNA saw a chance to become a worldwide global player in mobile social networks. Gree, DeNA’s rival in Japan, had to step up on the global stage as well and it acquired OpenFeint for $104 million. Ngmoco’s Neil Young believes that the billion-dollar companies will be created in the mobile social network space in the next couple of years because of the discovery problem.

Beyond the mobile social networks, all sorts of supporting companies are attacking the discovery issue. Tapjoy is promoting games through its own powerful marketing networks. Applifier is adapting its Facebook promotion bar to mobile. Getjar is offering strategic placement in its app store to promote games. Even American Express, Paypal, Zong, Visa and other payment companies will get in on the act, finding ways to eliminate the friction in paying for mobile games so an ever-wider audience can enjoy them.

The investment juggernaut

Game companies raised $1.05 billion in 2010, up 58 percent from a year earlier. Only four of the top 20 companies on that list last year were mobile companies. This year, Zynga alone could raise more than $1 billion in one fell swoop with its expected initial public offering.

But now we’re seeing investors who are embracing mobile-first strategies, where game companies lead with mobile games. The momentum of this investment into mobile is clearly growing.

TinyCo raised $18 million. Digital Chocolate raised $12 million. Pocket Gems raised $5 million. Rovio raised $42 million. The investors are also getting more interesting: Accel Partners, Kleiner Perkins, Sequoia Capital and Marc Andreessen are all moving into the market. Storm8 hasn’t raised money, but it is generating considerable revenue, having recently reported its first $1 million revenue day.

This heavy investment is aiding and abetting a talent migration, as veteran game developers see more opportunity in mobile games and other digital arts. Jordan Weisman, who has made every kind of game imaginable from the Mech Warrior series to alternate reality games, recently started his own new mobile and social games startup, Harebrained Schemes. The Seattle company is creating Crimson, an iPhone game as the first game to be published by Bungie — maker of the Halo series of games — under its brand new Bungie Aerospace third-party publishing division. Asked why he did this, Weisman said that he’s old and doesn’t have too many more games left to make. The idea of taking a few years to work on one game just isn’t attractive to him; but the short cycles of mobile games changes that clock for him. Lured by the chance of riches or similar ambitions, there’s a whole generation of talent migrating to mobile games now.

Free-to-play paves the way

Free-to-play gaming has helped pave the way for a real business model in mobile games. Apple introduced in-app purchases — the ability to buy something such as a virtual good without leaving an app — in the fall of 2009. Google introduced in-app purchases this summer. On the App Store, about 65 percent of the revenue from the top-grossing games now comes from free-to-play games, according to mobile analytics firm Flurry. Back in January, only 39 percent of the revenue from the top 100 games were free-to-play. Separately, Xyologic reported in March that 40 percent of game downloads were free-to-play games.

That has drawn bigger companies such as Zynga, which recently launched CityVille Hometown on the iPhone. Last year, Zynga paid $53.3 million to acquire mobile game maker Newtoy, creator of Words With Friends, a hit Scrabble-like game. Zynga is acquiring mobile game companies regularly now, and it has 11 games on mobile phones.

But for every endorsement of the mobile game market, there is a setback. Apple wounded its own market in April when it abruptly cut off pay-per-install marketing, where developers paid marketers such as Tapjoy to offer incentives to users to install other apps. Apple felt that developers were buying their way onto the top 25 lists. That’s driving companies such as Storm8 to expand on Android. The effect is that it has become harder to launch new games which go on to be a top hit, said Matthaus Krzykowski, founder of app store search firm Xyologic and a frequent VentureBeat contributor.

The path to the future

But there’s hope that mobile games will become a great market. Nielsen Research says that games continue to be the most popular category for apps. About 93 percent of app downloaders are willing to pay for games that they play. On average, mobile gamers play 7.8 hours a month, while iPhone users in particular play 14.7 hours a month. In Japan and Europe, mobile game usage is huge, and it is growing in the U.S. A survey by PopCap said a third of U.S. and U.K. adults have played a mobile game in the past month.

Tablet games are likely to take the market in a new direction. Companies such as OnLive are streaming high-quality PC games onto tablets such as the iPad 2. With game-streaming, the power of the hardware for the mobile device doesn’t matter. Games are stored and executed in a distant server, and video is sent down to the user’s machine, which can display the video whether it running on a PC or a tablet or, eventually, a smartphone.

Rob Wyatt, chief scientist of game-streaming firm Otoy, believes that game streaming could make consoles obsolete, allowing devices of any kind to run high-quality games. Cloud-based games will require good wireless connections to keep the two-way stream from being interrupted, but that technology is in the works. Steve Perlman at OnLive is working on something called Dido that will have virtually unlimited bandwidth for delivering high-speed data to wireless users. It sounds crazy, but OnLive itself seemed crazy two years ago. Now it works.

Meanwhile, many game companies are beginning to adapt online web games so they run on tablets, with routines added to support touchscreen or accelerometer controls. The tablet market may be an even bigger free-for-all, as both smartphone game makers and PC/console/web game makers can target the platform.

Sony and Nintendo, meanwhile, are doubling down on their investments in mobile games at the high end to make sure that Apple and Android devices don’t steal their high-value customers. Nintendo launched glasses-free 3D viewing on the 3DS in March, and Sony is preparing to launch the PlayStation Vita handheld with console-like graphics this fall. Nintendo’s Iwata insists that the company won’t be doing smartphone games.

HTML5 vs Native apps

Another factor that will affect the future of mobile games is HTML5, the new lingua franca for mobile and web apps that allows a game written in the format to run on a variety of platforms and devices. Digital Chocolate’s Hawkins believes that the arrival of HTML5-based mobile browsers will set game companies free from the restrictions of app stores.

HTML5 games run fairly slowly right now, so native apps, or those designed to run on specific devices, perform the fastest. But that could change over time as developers learn how to fine-tune their games.The latest approach to doing this is the “hybrid app,” which is a native app that runs all of its components in a browser. The fastest games must still be coded in native formats, but that could change. The game engine makers and other tool makers may figure out how to make cross-platform games.

With games running in the browser, users won’t be dependent entirely on purchasing apps from app stores, which take a 30 percent cut. That would complete the revolution that began with the creation of the app store concept, which bypassed the gatekeeper carriers who previously had control over which apps were available for purchase. When the app store owners lose control themselves, content will be free. And that, Hawkins argues, will lead to a $100 billion game industry.

Whether that happens or not, it’s a rosy future for mobile games. At our conference in a couple of days, you’ll hear people from across this entire spectrum — from people like Atari founder Nolan Bushnell to technologists creating the future such as Otoy’s Rob Wyatt. We hope you’ll join us.

We’ll be exploring the most disruptive game technologies and business models at our third annual GamesBeat 2011 conference, on July 12-13 at the Palace Hotel in San Francisco. It will focus on the disruptive trends in the mobile games market. GamesBeat is co-located with our MobileBeat 2011conference this year. To register, click on this link. Sponsors can message us at sponsors@venturebeat.com.

Our sponsors include Qualcomm, Flurry, Greystripe, Nexage, Tapjoy, FunMobility, TriNet, Zong, Sibblingz, OpenFeint, Spil Games and

WildTangent.

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Friday, July 29, 2011

Making Money Web

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