Here is a sobering thought with which to start 2012. The human brain has more neural connections than there are particles in the known universe. We are complex, we are magnificent. But what if the destiny of this most marvelous creation is simply to play Fruit Ninja, or Angry Birds, on a smartphone?
That thought might strike you as shallow, but there is reason to think it’s true — and that it will have a profound impact on the future of our culture, our economy, and our business landscape. To point to one notable example, I believe that a handful of relatively young gaming outfits are among the only companies in the world currently in a position to challenge Facebook’s growing dominance of social media.
Mobile gaming is growing at a staggering clip. It already rakes in more money than the combined revenues of Nintendo and Sony. Yet we are just at the start. According to market forecaster Gartner, the U.S. mobile gaming market was worth $1.53 billion last year. By the end of the decade that number is expected to rise to $7.8 billion. Globally, Gartner thinks that mobile game sales could be worth $11.4 billion by 2014, up from $5.6 billion in 2010.
Facebook and its social gaming partner Zynga have gotten a great deal of attention lately, and for good reason. But Facebook doesn’t dominate mobile. Apple and Google’s Android operating system do: They make money from the sale of apps and advertising that takes place on their mobile sites. Gartner estimates that mobile apps and advertising are growing at close to 160% a year, and last year generated $12 billion globally. Google and Apple took the largest slice of those revenues.
Facebook, meanwhile, was slow in adapting its site to the mobile internet. Only a third of Facebook’s traffic is said to come from mobile, compared to over 55% for Twitter. So the question is whether Facebook can mount a serious challenge to Apple and Google as a storefront for independent game developers.
It’s no slam dunk. Not only must Facebook compete with the two smartphone giants, it also has to compete with a clutch of new wave social networking sites focused on mobile gaming. Chief among the upstarts is Gree, a Japanese quoted company whose stock rose more than 130% last year. Gree claims to have 150 million users but plans to ramp that to a billion after it launches a global mobile social gaming network sometime in the next few months.
Can it achieve those numbers? I think it’s distinctly possible. Facebook currently has around 800 million users. That’s a lot, but it only amounts to 12% of the global population. Meanwhile, there are roughly the same number of smartphones in the world, just a fraction of the 5.6 billion people world-wide who own a conventional mobile phone. That will change soon. Perhaps the single most important shift in technology in the coming years will be the replacement of most of those 5-plus-billion handsets with low-cost smartphones capable of playing games and social networking. The trend, being led by Chinese handset makers such as ZTE, is to crash the price of smartphones so that more people in developing markets can afford one. Analysts expect that some 650 million smartphones will be shipped globally this year alone.
And where will all those new smartphone owners go to find, and buy, their games and to play against their friends? In the PC world, game developers like Zynga have been happy to use Facebook to reach their audience, and Facebook has profited handsomely from the arrangement. Each time a Facebook user downloads a Zynga game, the social networking site takes a 30% cut of the revenue.
But Apple and the Google Android App site offer the same deal – and they have much more to offer mobile game developers than Facebook does. For instance, Apple has 250 million credit card details, which makes it easy to collect payment. Furthermore, because they control the software that runs their handsets, both Google and Apple can offer developers better support, so the games will work more smoothly and make better use of the phone’s features, such as the camera or motion control. In short, Facebook probably made a serious tactical error by not partnering with one of the two biggest forces in mobile, and Apple ended up allying itself with Twitter for social networking.
In addition, sites like Gree and Papayamobile — a Beijing- and Silicon Valley-based mobile gaming company that’s also hoping to surf the smartphone tsunami to global dominance — provide a more focused user base than Facebook can for both game players and advertisers. And these sites are gaining momentum. Late last year Gree sealed a deal with Paypal to provide a mobile payment mechanism. And last April it paid $104 million for OpenFeint, a U.S. mobile gaming network that Gree will use as the spring board to hit its target of signing up 1 billion gamesters.
Facebook is not standing still, of course. It has developed a mobile social gaming network itself. But Facebook CEO Zuckerberg must know that it has been exceedingly rare for a company that dominates one type of computer, such as the PC, to then dominate the next generation of computing device. Facebook and Zynga will have their work cut out trying to keep up with smartphone focused companies such as Apple and fast growing mobile gaming networks like Gree and Papayamobile.
Keith Woolcock has been covering technology as an analyst and journalist since the mid 1980s. He has worked for Nomura, Merrill Lynch, the Daily Telegraph and the Mail on Sunday; appears regularly on CNBC in London; and in 2010 founded 5thcolumnideas, which provides global thematic research and spots important investment trends — especially in technology — for institutional investors.