Software, Interrupted

My previous post about mobile data sync brought in several public comments and many more private e-mails from various companies asking for perspective on how the leading mobile platforms will compete in the sync space and whether or not start-ups like Funambol can compete.

More than anything else, the leading mobile devices--the iPhone and BlackBerry, are marketed more effectively than any other platform, especially Windows Mobile, which by all counts should be the leader.

It's not that Windows Mobile is so terrible (you can decide for yourself), but that Microsoft hasn't done enough to make users want to use it.

In a conversation today, I learned a bit about Microsoft's My Phone service, which I had previously never heard of, and also a bit about Palm's strategy in relation to making the Pixi a device of choice for the younger set. Minutes later, the two worlds collided when I hit the My Phone site and came across this image of bitter irony.

Is this ad in context?

(Credit: Screenshot by Dave Rosenberg)

It's an ad for a Palm product that doesn't run Windows Mobile, or work with the Microsoft service, running on the MSN ad network, prominently displayed on the My Phone page. It confused me so much that I actually clicked on the ad to see if the services were somehow related.

There definitely is some logic from the Palm side--i.e. getting users to their devices, but this is an interesting failure of contextual advertising for Microsoft, allowing a direct competitor dominate the banner ad on their service page. Really, neither side benefits from the ad placement and considering the woeful state of both businesses, one would hope they care enough to not embarrass themselves and at least keep competitor ads off of their own sites.

While neither Windows Mobile nor Palm will be totally dead any time soon, if I'm on Apple's iPhone team, or working on Android, I wouldn't be too worried.

Danc at the Lost Garden blog has written up an excellent analysis of why Flash games are great, but represent "the ghetto of the game development industry" in terms of revenue generation.

Compared to the number of players it serves, the Flash game ecosystem makes little money, launches few careers, and sustains few developer owned businesses.

There is too much reliance on advertising and not enough on sustainable paid methods, or "offers" such as subscriptions, in-game consumables, and level un-locking to encourage people to pay--and create an actual business.

There is no need to limit yourself to any single one revenue stream. There are lots of different types of players and each player values something differently. Some players may be willing to buy a t-shirt. Others may want 5 stackable subscriptions. Others may just want a pretty new character with a panda head. When you restrict your game to a single revenue source, you miss out on gaining money from all the different types of customers that would have paid you if you had just given them the right offer.

In a recent report, research firm Screen Digest says that in-game advertising will hit $1 billion by 2014. Not bad, but nowhere near virtual goods, which may already be worth $5 billion in Asia alone.

Virtual goods have a low barrier to entry but a huge swath of virtual-world competition is trying to monetize users. Game play, branding, and the overall offering have to all mesh for virtual goods to sell well.

In-game advertising is complex and there are a few major players that control the games, consoles, and monetization, putting up some serious barriers to entry. To date, most in-games have been custom deals that are lucrative but don't scale well.

I've written in the past that standards will drive in-game advertising growth as it's currently too difficult to deal with the varied walled-gardens of both console and online games. And there are some interesting experiments under way, including a recent IGA deal with Posterscope to simultaneously run in-games on billboards. I'm not convinced it makes sense, but it is a cool attempt to bridge the physical and virtual worlds.

The next big innovation will be when in-game ads and virtual goods merge--allowing users to interact with ads to purchase products.

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Sooner or later, I will put all my 2009 predictions together, but in the meantime, I've come up with two business trends that I think we'll see next year:

1. Web start-ups will move to premium services and subscriptions
2. Self-funding will rule for "ecosystem" plays

Ad-supported sites will move to a "free-mium" approach or die by the end of the year.
Free-mium and paid services will become the norm next year, as advertising wanes and companies realize that ad-supported business models were not that great to begin with. Even Digg, with all its traffic, has little to show for the advertising model.

It's clear that the sorry state of the economy will have some negative business effects. Enterprise purchasing decisions seem to be slowing down, but on a positive note consumption of the internet and video games seem to be on the rise--which means advertising should be able to weather the storm.

IAB announced today that internet advertising is up 15.2% to $11.5 billion for the first half of 2008 versus the same period in 2007.

Of course that was before the economic meltdown.

Jeremy Liew wrote that we are in an advertising recession and that advertisers will stick to what they know, which means trusted ad networks and direct response marketering. I would also suggest that "actionable" advertising such as rewards and coupons will become more appealing as marketers can better refine the targets and the actions they take.

On the other hand, Matthew Ingraham found that "many marketers believe that online advertising has actually been benefiting from the economic uncertainty, as advertisers look at the Web as more measurable and effective." And Svetlana Gladkova at Profy found that advertising was actually pretty healthy during the Great Depression.