Ring up Jamdat

12/10/2004 12:00 am EST

Focus:

"The booming video-game business has finally gone wireless and there is a new crop of players taking the helm," says wireless industry expert Nikhil Hutheesing. Here, the editor of  Forbes Wireless Stock Watch  offers an in-depth look at his favorite stock to play this trend.

"Wireless video gaming is a nascent but rapidly growing business. The best way to play this is Jamdat Mobile (JMDT NASDAQ), a pure play in the sector. Jamdat was formed in 2002 by two former employees of Activision, to bring the gaming business to cell phones, PDAs, and other handhelds. Its strategic goal is to be the dominant force in cell-phone gaming, and I believe the company has a good shot of getting there. Wireless service providers want applications that will keep customers coming to their services and staying online. Jamdat’s got them. So far, the company has a portfolio of more than 70 applications that it has created including video game titles as well as downloadable ringtones, wallpaper, and screensavers.

"The market for mobile gaming is just beginning to take off and it stands to become huge. As high speed, third generation networks are deployed and new multimedia handsets come onto the market, demand is going to surge. Wireless gaming revenue could more than double to $203.8 million this year. By 2009, wireless games are expected to generate $1.8 billion annually and worldwide revenue will reach $9 billion. Fueling all this will be not just multiplayer games, which will quickly become commonplace, but demand for 3-D graphics and even location-based games.

"So far, about 80 wireless carriers in 39 countries serving 880 million subscribers around the world are working with Jamdat. The group includes big names such as Verizon Wireless, Sprint, AT&T Wireless, China Mobile, Tata Teleservices of India, and Telefónica Móviles of Spain. By combining the marketing muscle of the service providers with the content from Jamdat, the company has a good chance of success. Jamdat is also working to establish close relationships with handset manufacturers. Currently, Jamdat’s applications work with about 300 different phone models. These relationships give Jamdat an edge. For small wireless gaming companies, it is very difficult to establish relationships with the carriers.

"Because it’s all wireless, Jamdat doesn’t have the typical distribution complexities and costs, such as physically producing games, packaging them, shipping them, handling returns and managing inventory. Jamdat’s customers download the games to their mobile phones through their carrier. Customers are charged a fee which appears on their mobile phone bills. A game typically costs $4 to $7.50 to buy or $1.50 to $3 per month for a subscription. The revenue is then shared, according to agreement, between the carrier and Jamdat. Today, about 78% of Jamdat’s revenues come from US subscribers—mostly Verizon Wireless, which accounts for 40% of revenue and Sprint PCS, which accounts for about 18% of revenue. Others, such as Nextel, Cingular, and T-Mobile, have not been aggressively marketing data applications, but are likely to do in 2005.

"Jamdat made stock market headlines in September when the company went public. Selling shares for $16, the stock rose 48% bringing in about $88 million. By early November shares reached $34.86 giving Jamdat a market value of more than $600 million. On November 9, after reporting ‘disappointing’ third quarter earnings, the shares fell 30%. But Wall Street missed the forest for the trees with its short-term outlook. Keep in mind that this four-year-old company turned a $1 million profit in the first six months of 2004 after losing $7 million last year. Now, to gain market share, JMDT is boosting its spending in R&D as well as sales and marketing. It will need to hire more staff in its foreign markets. All this is necessary for a growing business, even though it puts pressure on earnings.

"Jamdat has come a long way since it was founded just four years ago. The mobile gaming market is also at an inflection point. Currently, ringtones are the drivers of the mobile entertainment marketplace, but I believe that will change and that carriers will increasingly demand more advanced applications, such as games to increase their average revenue per user. The cell phone gaming business could become the biggest aspect of the video game business because many more people own and use cell phones than own game consoles or gaming PCs. No public company is better positioned to benefit than Jamdat. In my view, the recent stock drop has created a wonderful opportunity for investors to get in to a high growth business at a more reasonable price."

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