Pocket Gems has raised $5 million in funding from Sequoia Capital and other Silicon Valley luminaries as it competes in the crowded iPhone game market.
The small San Francisco company has had five major hits on the iPhone, even though its founders were still in university when they launched their first game a year ago. The funding from venerable venture capital firm Sequoia is a testament to the rapid growth of the iPhone as a viable platform for making money with games. The funding also included Michael Dearing, an eBay veteran and associate professor at the Stanford University Institute of Design, Jeff Fluhr, co-founder and former chief executives of StubHub, and Omar Hamoui, founder of AdMob. Sequoia partner Jim Goetz will join Pocket Gems’ board.
That’s rarified company for an independent maker of iPhone games with only 11 employees. But Pocket Gems has seen all five of its games hit the top 10 list on the iPhone and have been downloaded more than 15 million times. Daniel Terry, chief executive, and Harlan Crystal, chief technology officer, founded Pocket Gems in 2009 while Terry was still an MBA student at Stanford University. Their first game was Tap Farm for the iPhone, and they’ve followed it up with Tap Store, Tap Jungle, Tap Zoo and Tap Zoo Christmas.
In an interview, Terry said they were in the right place at the right time to take advantage of the emerging virtual goods business model on the iPhone. Just a year ago, Apple launched its in-app purchases, which allowed gamers to buy virtual goods within a game. That turned out to be a much more lucrative business opportunity for many game makers, including Ngmoco, which was acquired for $403 million by Japan’s DeNA. All of Pocket Gems games are free-to-play, where users play for free and pay real money for virtual goods via the in-app purchases.
Goetz said in an interview that Sequoia — which has funded lots of blockbusters from Apple to Electronic Arts — was interested in Pocket Gems because the team was so skillful at building hit games and the technology to go with them. Many game developers outsource the social networking in their games to companies such as OpenFeint. But Terry said that Pocket Gems uses Facebook Connect and has built its own platform for encouraging gamers to share games with their friends.
In the past, venture capital firms focused on Facebook game companies rather than iPhone game companies. But Facebook is now the domain of big companies such as Zynga, CrowdStar, EA Playfish, Disney-Playdom and others. With the Ngmoco purchase, mobile gaming is getting a lot more attention. Smartphones are gaining traction and the overall mobile gaming market could almost double from $6 billion in 2009 to $11 billion in 2015, according to Juniper Research. Much of the increase could come from virtual goods sales.
Terry said the company was profitable within weeks after its founding and remains so today. He also said that revenues are now above a million dollars a month, though he declined to be more specific. The company’s games are available on iOS (iPhone, iPod Touch, iPad) devices and will expand to Android soon. Terry said the company will hire new developers to increase its pace of development.
“The App Store ecosystem has democratized mobile game development,” said Terry, who got his MBA four months ago.”If you have a good game, you can get it in front of tens of millions of players.”
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Netflix is one of the best performing stocks this year, up 225 percent year-to-date, with a $9.3 billion market cap. But it is also priced to perfection, with a lot of short sellers hoping to profit from its fall and antsy Wall Street analysts downgrading the stock. Today, CEO Reed Hastings defended Netflix’s prospects in a very public, very detailed, and very unusual blog post on Seeking Alpha. The post was in response to a specific short seller, Whitney Tilson, who last week laid out his case against Netflix in another Seeking Alpha blog post. By addressing this one short seller, of course, Hastings is trying to address the market’s jitters as a whole, and he does a pretty convincing job of it.
Tilson raised a number of concerns, ranging from the recent resignation of Netflix’s CFO to pressures on Netflix’s margins to market saturation and increasing competition in streaming video. Hastings acknowledges that Tilson “only has to be right on one or two of these issues in 2011 for him to make money on his short of Netflix. . . . Odds are he is wrong on all of them, in my view.”
Hastings then goes on to rebut the short seller’s argument (short sellers are investors who bet against a stock). I’ll summarize each of Hasting’s counter-arguments below:
- The CFO left because he wasn’t going to become CEO anytime soon.
- The First Sale Doctrine (which allows Netflix to rent DVDs after purchasing them) may be under attack, but it won’t change in 2011. And Netflix’s video streaming business is growing so fast that by the time it does have any impact on DVD costs, it won’t matter anymore.
- Internet bandwidth costs should continue to decline, and while ISPs might like to charge content providers for data, that won’t happen in 2011.
- Free cash flow has taken a hit because of the increased payments Netflix is making to media companies and content owners, but Netflix will begin smoothing that out on a quarterly basis instead of taking big hits once a year.
- Market saturation in streaming video over the Internet is not yet an issue. Market demand is still accelerating.
- Criticisms about “weak content” are not supported by subscriber’s voracious appetite for what Netflix has to offer, but Netflix is trying to get better movies and TV shows all the time.
- Content costs are going up, but postage costs are going down as viewers shift to streaming.
- If necessary, Netflix will take a hit to growth before taking a hot to margins. ”Management at Netflix largely controls margins, but not growth.”
- Netflix is facing a growing number of competitors in streaming video, but it maintains advantages in scale and brand.
- TV Everywhere could become a long-term threat, but it is more of a defensive move fro the cable companies rather than a new profit engine.
- International expansion could have an impact on margins in the short term
Let’s drill down further into some of these issues. Netflix is obviously betting big on the transition to streaming video. The more it can get subscribers to watch streams instead of DVDs, the more it saves on postage. On the flip side, video content owners are demanding more money for those streaming rights. Hastings thinks that concerns about too many streaming services coming online is overblown at this point:
Streaming is growing rapidly; it is propelling Hulu, YouTube, Netflix and others to huge growth rates. Streaming adoption will likely follow the classic S curve, and we’re still on the first part (acceleration) of the S curve. Since we expanded into streaming, Netflix net subscriber additions have been 1.9m in 2008, 2.9m in 2009, and over 7m this year (estimated). While saturation will happen eventually, given the recent huge acceleration of our business specifically, and streaming generally, saturation seems unlikely to hit in the short term.
And while a major new streaming competitor could come in and blow away Netflix’s lead, Hastings makes the case that Netflix has a huge competitive advantage when it comes to the number of existing paying subscribers and its cost to acquire new ones:
For a competitive firm to materially hurt our growth, they have to have some positive differentiator (price, additional content, integration, etc.), and then they have to market their service effectively. This wild-card of major new competitor offering great content and marketing aggressively is the single best near-term short thesis, but no one knows if it will happen in 2011.
The core competitive barrier for direct competitors is brand/subscriber-evangelism. Our large subscriber base is very happy with Netflix, and tells their friends about Netflix. That means that the cost of acquiring the incremental 1m subscribers is lower for us than for a competitor, and thus our net additions are higher
Finally, in terms of the quality of the movies and TV shows Netflix makes available for streaming versus what people get on cable TV, Hastings points out:
. . . at $7.99 per month, consumers don’t expect to have everything under the sun. A variant of this misunderstanding is when DirecTV (DTV) advertises against Netflix, calling out some Netflix content weaknesses. When an $80 per month service is picking on an $8 per month service, the $8 per month service just gets more attention from consumers and grows even faster.
The key question is whether some combination of Netflix, Hulu Plus, YouTube, Google TV and other Internet video services will some day effectively replace the cable TV experience. And if it can, whether that combination will cost more or less than the $80 or more people pay for cable today. But remember, people are already paying for Netflix, which helps Hasting’s case.
Whether or not the stock will keep going up is another question entirely. At $178 a share, would you buy or short the stock?
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Julian Assange | Sarah Palin | Fox <b>News</b> | Mike Huckabee | Mediaite
In an exclusive interview with Cenk Uygur on MSNBC's Dylan Ratigan Show, Julian Assange described criticism in Washington and elsewhere of WikiLeaks as nothing short of attacks on journalism and the first amendment.
CBS <b>News</b> airs fake, typo-ridden cover of Bush's 'Decision Points <b>...</b>
During a Sunday book special, CBS News aired a misspelled, mocking cover of Bush's memoir Decision Points.
Denver Broncos <b>News</b>: Horse Tracks - 12/23/10 - Mile High Report
Your daily cup of Orange and Blue Coffee -- Horse Tracks!
bench craft company scam
Julian Assange | Sarah Palin | Fox <b>News</b> | Mike Huckabee | Mediaite
In an exclusive interview with Cenk Uygur on MSNBC's Dylan Ratigan Show, Julian Assange described criticism in Washington and elsewhere of WikiLeaks as nothing short of attacks on journalism and the first amendment.
CBS <b>News</b> airs fake, typo-ridden cover of Bush's 'Decision Points <b>...</b>
During a Sunday book special, CBS News aired a misspelled, mocking cover of Bush's memoir Decision Points.
Denver Broncos <b>News</b>: Horse Tracks - 12/23/10 - Mile High Report
Your daily cup of Orange and Blue Coffee -- Horse Tracks!
bench craft company scam
Julian Assange | Sarah Palin | Fox <b>News</b> | Mike Huckabee | Mediaite
In an exclusive interview with Cenk Uygur on MSNBC's Dylan Ratigan Show, Julian Assange described criticism in Washington and elsewhere of WikiLeaks as nothing short of attacks on journalism and the first amendment.
CBS <b>News</b> airs fake, typo-ridden cover of Bush's 'Decision Points <b>...</b>
During a Sunday book special, CBS News aired a misspelled, mocking cover of Bush's memoir Decision Points.
Denver Broncos <b>News</b>: Horse Tracks - 12/23/10 - Mile High Report
Your daily cup of Orange and Blue Coffee -- Horse Tracks!
bench craft company scam
Julian Assange | Sarah Palin | Fox <b>News</b> | Mike Huckabee | Mediaite
In an exclusive interview with Cenk Uygur on MSNBC's Dylan Ratigan Show, Julian Assange described criticism in Washington and elsewhere of WikiLeaks as nothing short of attacks on journalism and the first amendment.
CBS <b>News</b> airs fake, typo-ridden cover of Bush's 'Decision Points <b>...</b>
During a Sunday book special, CBS News aired a misspelled, mocking cover of Bush's memoir Decision Points.
Denver Broncos <b>News</b>: Horse Tracks - 12/23/10 - Mile High Report
Your daily cup of Orange and Blue Coffee -- Horse Tracks!
bench craft company scam
Julian Assange | Sarah Palin | Fox <b>News</b> | Mike Huckabee | Mediaite
In an exclusive interview with Cenk Uygur on MSNBC's Dylan Ratigan Show, Julian Assange described criticism in Washington and elsewhere of WikiLeaks as nothing short of attacks on journalism and the first amendment.
CBS <b>News</b> airs fake, typo-ridden cover of Bush's 'Decision Points <b>...</b>
During a Sunday book special, CBS News aired a misspelled, mocking cover of Bush's memoir Decision Points.
Denver Broncos <b>News</b>: Horse Tracks - 12/23/10 - Mile High Report
Your daily cup of Orange and Blue Coffee -- Horse Tracks!
bench craft company scam
Julian Assange | Sarah Palin | Fox <b>News</b> | Mike Huckabee | Mediaite
In an exclusive interview with Cenk Uygur on MSNBC's Dylan Ratigan Show, Julian Assange described criticism in Washington and elsewhere of WikiLeaks as nothing short of attacks on journalism and the first amendment.
CBS <b>News</b> airs fake, typo-ridden cover of Bush's 'Decision Points <b>...</b>
During a Sunday book special, CBS News aired a misspelled, mocking cover of Bush's memoir Decision Points.
Denver Broncos <b>News</b>: Horse Tracks - 12/23/10 - Mile High Report
Your daily cup of Orange and Blue Coffee -- Horse Tracks!
bench craft company scam
Julian Assange | Sarah Palin | Fox <b>News</b> | Mike Huckabee | Mediaite
In an exclusive interview with Cenk Uygur on MSNBC's Dylan Ratigan Show, Julian Assange described criticism in Washington and elsewhere of WikiLeaks as nothing short of attacks on journalism and the first amendment.
CBS <b>News</b> airs fake, typo-ridden cover of Bush's 'Decision Points <b>...</b>
During a Sunday book special, CBS News aired a misspelled, mocking cover of Bush's memoir Decision Points.
Denver Broncos <b>News</b>: Horse Tracks - 12/23/10 - Mile High Report
Your daily cup of Orange and Blue Coffee -- Horse Tracks!
bench craft company scam
Julian Assange | Sarah Palin | Fox <b>News</b> | Mike Huckabee | Mediaite
In an exclusive interview with Cenk Uygur on MSNBC's Dylan Ratigan Show, Julian Assange described criticism in Washington and elsewhere of WikiLeaks as nothing short of attacks on journalism and the first amendment.
CBS <b>News</b> airs fake, typo-ridden cover of Bush's 'Decision Points <b>...</b>
During a Sunday book special, CBS News aired a misspelled, mocking cover of Bush's memoir Decision Points.
Denver Broncos <b>News</b>: Horse Tracks - 12/23/10 - Mile High Report
Your daily cup of Orange and Blue Coffee -- Horse Tracks!
bench craft company scam
Julian Assange | Sarah Palin | Fox <b>News</b> | Mike Huckabee | Mediaite
In an exclusive interview with Cenk Uygur on MSNBC's Dylan Ratigan Show, Julian Assange described criticism in Washington and elsewhere of WikiLeaks as nothing short of attacks on journalism and the first amendment.
CBS <b>News</b> airs fake, typo-ridden cover of Bush's 'Decision Points <b>...</b>
During a Sunday book special, CBS News aired a misspelled, mocking cover of Bush's memoir Decision Points.
Denver Broncos <b>News</b>: Horse Tracks - 12/23/10 - Mile High Report
Your daily cup of Orange and Blue Coffee -- Horse Tracks!
bench craft company scam
Julian Assange | Sarah Palin | Fox <b>News</b> | Mike Huckabee | Mediaite
In an exclusive interview with Cenk Uygur on MSNBC's Dylan Ratigan Show, Julian Assange described criticism in Washington and elsewhere of WikiLeaks as nothing short of attacks on journalism and the first amendment.
CBS <b>News</b> airs fake, typo-ridden cover of Bush's 'Decision Points <b>...</b>
During a Sunday book special, CBS News aired a misspelled, mocking cover of Bush's memoir Decision Points.
Denver Broncos <b>News</b>: Horse Tracks - 12/23/10 - Mile High Report
Your daily cup of Orange and Blue Coffee -- Horse Tracks!
bench craft company scam
Julian Assange | Sarah Palin | Fox <b>News</b> | Mike Huckabee | Mediaite
In an exclusive interview with Cenk Uygur on MSNBC's Dylan Ratigan Show, Julian Assange described criticism in Washington and elsewhere of WikiLeaks as nothing short of attacks on journalism and the first amendment.
CBS <b>News</b> airs fake, typo-ridden cover of Bush's 'Decision Points <b>...</b>
During a Sunday book special, CBS News aired a misspelled, mocking cover of Bush's memoir Decision Points.
Denver Broncos <b>News</b>: Horse Tracks - 12/23/10 - Mile High Report
Your daily cup of Orange and Blue Coffee -- Horse Tracks!
bench craft company scam
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