Disruptive Innovation: Mobile Game Makers Build Cross-Media Franchises In Film, TV, Toys, Clothes - And Anything Else They Feel Like

Talk about your disruptive innovation. Mobile apps makers have been eyeing the big entertainment conglomerates like the Mongols eyeing ancient China. And just like their marauding predecessors they like what they see: a big target with fat margins. As for the defenses against incursions by outsiders like themselves, they'll take their chances and think the odds are in their favor.

Buoyed by growing profits from the increasing focus on mobile commerce, the app/game makers are reversing what might appear to be the logical sequence of big companies moving into the app space and are attacking the accessories markets over which the entertainment moguls have enjoyed exclusive sway through out recent memory. Among the insurgent apps-makers' advantages are lower fixed and marketing costs as well as the broad reach that the mobile market provides. This gives them scale - and makes them attractive business partners.

Big Entertainment is saddled with huge expenses - and risk - due to the escalating cost of movies which are the cornerstones of their franchises. The apps makers have little to lose and huge profits to gain if they can execute this strategic shift. This is a classic example of asymmetric warfare; the little guy with fewer resources probes for weakness, finds it and exploits it. It will be fun to watch this happen and to see if it spreads to other sectors. JL

Cliff Edwards and Ronald Grover report in Business Week:

"Entertainment conglomerates such as Walt Disney (DIS) spend billions developing popular franchises. However, they've had mixed success translating those film, television, and theme park characters to smartphones, where more and more eyeballs are glued. The makers of some popular iPhone games are hoping they'll have an easier time going in the opposite direction, and are trying to launch cross-media franchises based on their hit digital characters. "The new entertainment medium is apps," says Paul A. Baldwin, chief marketing officer of Palo Alto (Calif.)-based Outfit7, whose Talking Tom app has been downloaded 50 million times.

Helsinki-based Rovio Mobile, with its popular Angry Birds game, may be the best known of the wannabe Disneys. "Mickey Mouse is one of our role models," says Peter Vesterbacka, a co-founder. Rovio and its rivals are now trying to build empires that span toys, clothing, greeting cards, TV shows, and movies. Outfit7's series of talking animal characters, Mind Candy's Moshi Monsters, and Lima Sky's Doodle Jump have each proven popular enough to sell tens of millions of app downloads as well.
Outfit7 introduced its hit app Talking Tom last June. It features a gray tabby that drinks milk and purrs when users scratch an iPhone's screen. Ten other talking characters have followed, including Ben, a gruff dog that likes to blow things up in his chemistry lab. Licensing and merchandising opportunities are part of the business plan, not an afterthought, says Baldwin. In 2002, when he was vice-president of marketing at Eidos Interactive, Baldwin struck a first-of-its-kind deal for Creative Artists Agency to represent one of Eidos's video game characters, Lara Croft of the Tomb Raider series. The deal led to two movies starring Angelina Jolie. Talking Tom and Talking Ben will have similar representation, Baldwin says, and four manufacturers have approached him to create a line of plush toys based on Outfit7's characters. He declined to name them because the company is still in negotiations. Last year, Rovio hired former CAA agent Peter Levin to help boost its chances in Hollywood.

One of the advantages of building a franchise based on casual smartphone games is that the characters tend to have a broad demographic reach. "Some of these properties are hitting all age groups, all demographics at once," says Michael S. Stone, chief executive officer of brand and trademark management agency Beanstalk Group, which is advising Outfit7 and Mind Candy on licensing deals with traditional media companies. And since 99¢ games require little investment and are often spur-of-the-moment purchases, they spread virally, requiring little formal advertising. "The big advantage that small companies have is this amazing ecosystem that Apple created," says Igor Pusenjak, a co-founder of Lima Sky. "You get a direct connection to consumers who are more influenced by friends than million-dollar ad campaigns or promotions."

Mobile entertainment companies can develop new characters for a fraction of what it costs to make a movie. To create Doodle Jump, Pusenjak and his brother Marko invested $1,000 in a laptop, $100 in Apple's (AAPL) software kit for developers, and a few weeks' effort. The 99¢ game lets players guide Doodle the Doodler on a journey up a series of platforms, using the tilt controls of the iPhone, iPod touch, or iPad to jump obstacles. Downloaded more than 10 million times, it has spawned a line of T-shirts, mugs, key chains, and posters.

Barry Cottle, executive vice-president of video game giant EA Interactive (ERTS), says established entertainment companies like his have the experience necessary to turn an idea into a franchise, "whereas it's harder for the small developers to get that level of scale quickly." At an analyst conference in February, Disney said it was able to generate $7.3 billion in retail sales based on last summer's Toy Story 3.

Old and new media have learned to work together in some cases. Twentieth Century Fox partnered with Rovio for a special edition of the Angry Birds game featuring characters from the studio's Rio animated film. For Hop, a Universal Pictures comedy about a rabbit, Lima Sky built a bonus level into Doodle Jump that lets users play as the film's main character. Once there's a relationship between consumers and a character in one medium, "it's easy to think about extending that into different mediums," Baldwin says.

The bottom line: Mobile developers are hiring licensing experts and agents to give their characters lives beyond iPhones and a chance at big profits.