When talking to my friends from my entertainment lawyering days, I often get asked about my thoughts on the place for brands in mobile gaming. Tough question. Looking at the App Store now, one would think there really isn’t much to be done on the brand front. “Name” intellectual property just hasn’t had the impact on the rankings one might hope. One cannot help but wonder why.

Allow me to opine at length.

A Matter of Approach

High quality intellectual property makes it way into games through a three primary means: (1) first party development, (2) license, or (3) work-for-hire. Each of these has very different incentives and advantages to it, and each scenario isn’t particularly appealing given the current structure of the app marketplace.

First Party Development

First Party Development occurs when the owner of the intellectual property, say a movie studio, decides to build out its own team and develop the game internally. This has the advantage of retaining total control and aligning incentives between the developer and the IP holder. Normally, these advantages would all be very attractive, but there are some problems when it comes to the mobile marketplace. Well, only one really big one. User acquisition.

The biggest advantage of a recognized intellectual property, a pre-existing audience, is largely erased on the mobile platform. The simple fact is that building a solid application and leveraging a community outside of the mobile ecosystem (say a devoted online community) is tough work. There’s simply too much friction in the process of convincing a person idly browsing your forums to cease that activity, pick up their mobile phone (assuming they have the right platform), search for your app, download your app, sign up for it, and return to the app regularly.

This means the intellectual property holder must fully commit to mobile, which is a speculative investment for the more traditional intellectual property holders (books, movies, television, etc.). Simply developing the application will not be enough, you’ll need to put significant resources into marketing and acquiring users, iterating on design and so forth. It’s a lot of work for a hard to quantify reward.

Work-For-Hire

This is the compromise a lot of intellectual property holders seek to make. A work-for-hire arrangement means an external developer will undertake the development of the game in exchange for a specified payment or revenue share. This has the advantage of permitting the intellectual property holder significant control without undertaking the significant expenditure of building out an internal developer. The natural downside is the occasional friction between developer and IP holder and potential decreases in quality.

Finding a solid outside developer willing to undertake work-for-hire contracts is hard work these days. Not impossible, just pretty damn tough. Most reputable developers are knee-deep in their own intellectual property and have little desire to undertake the misery of an overbearing IP holder. The barriers to entering the mobile app store, while rising, are still low enough that most engineers can get together a small team and take a whack at the American Dream. The financial upside on work-for-hire pales in comparison to a 200 million dollar exit.

I’d say I get asked about whether I know of a good mobile team working on a contract about once a month.

License

Depending on the terms, a license can potentially give an external developer the opportunity to take a solid IP and run with it. The IP holder forgoes the hassle of daily management and oversight in favor of a check and a veto vote (exercised when the developer goes off the deep end).

Unfortunately, there’s a massive gulf between the IP holder and the developers when it comes to the perceived value of the brand. IP holders are accustomed the receiving significant sums for a license, but mobile developers are generally unwilling to part with things like non-recoupable advances and or generous royalties. Frankly, it’s pretty tough to make the math work for both sides. If a developer is getting 70 cents on the dollar due to the platform cut, then another 20-30% going to the IP holder is potentially crippling, particularly when one considers the rising price of user acquisition.

In fact, developers that agree to that sort of deal are generally signing up for failure under the IP holder can deliver guarantees on marketing and installs (a term generally overlooked by developers). Unfortunately, IP holders have a hard time stomaching those sorts of terms because they feel like they’re giving enough value by providing access to the intellectual property in the first place. Frankly, I don’t think these deals can really work unless the developer has already solved user acquisition by having a large pre-existing user base (à la Zynga). However, a developer in the position probably doesn’t need a boost from outside IP or wouldn’t be willing to sign a deal that didn’t give them significant consideration for the enormous value of a pre-existing mobile audience.

Appetite

There’s also the broader issue of appetite for name brands on mobile. There is little indication that mobile phone owners have a strong preference for branded content. If anything, the mobile phone has become a place for people to experiment. With the free2play model, there is little risk attached to trying new content. If the cost to try is high (like a movie ticket) then the willingness to try the unknown goes down and the value of known commodities, like established intellectual property, goes up. The structure of the app market ensures that users are predisposed to churning through apps and experimenting. It’s a rough place for IP to demonstrate value in.

Another issue is the fact that mobile games simply aren’t sophisticated enough to operate as anything more than skins for an IP. Angry Birds or Doodle Jumper just aren’t great delivery devices for narratives. If the mobile app can’t leverage the depth of the IP, then it’s really tough to make the argument for the importance of the brand (barring pre-existing audience, which we already addressed above). In fact, taking a treasured IP and giving it a superficial treatment may result in a significant lashback from the community.

I can only think of one area where the incorporation of a brand has immediate and demonstrable value: children’s IPs. There’s two reasons for this: trust and low expectations. The “Parent buys app, hands iPhone to kid to shut him up” use case is well-recognized for mobile applications. Trust is an important criteria to the buying decision when a parent is contemplating what to expose their special little butterfly to. As a result, recognizable IPs that are known to be suitable for children come at a premium. The success of things like Smurf Village is a good example.

There’s also the kid to consider. Frankly, if the game has Spongebob in it in any form, then the kid is gonna be happy. Immersion is possible with nothing more than a few pieces of art wrapped around a simple game mechanic. As a friend once put it to me following a particularly questionable encounter with someone of the opposite sex: “My standards are low, but I’m never disappointed.”

Into the Future

I suspect some of the calculations will alter as the barriers to entry go up and the space consolidates a bit more. As there are more developers of scale, then some the audience problems begin to dissolve and IP becomes a potentially attractive means to monetize those audiences. I also think further evolution in the market will permit developers and IP holders to more accurately predict the value of a particular IP and the likely revenue one might derive from a specific type of app. As those calculations become more certain, then I think the opportunities to leverage outside IP become more clear.

JM: Yes, those $200M+ exits are hard to argue with. But visible examples aside, these are few and far between, compared to the vast number of developers making games for the App Store. Sometimes it makes sense to make a strategic decision to partner with a visible brand, to build your portfolio and standing. Once you get featured by a platform, it’s easier to get featured again, since you’re on their radar.

Also, while I agree that brands have been on the ebb, these things are cyclical. When platforms are young, original IP is strong. As they mature, and the arms race for development and marketing goes up, brands become more and more important to rise above the static. Plus, outlier IPs are seemingly immune to this seasonal behavior, since they are by nature evergreen. They don’t need a current movie, TV show, or book, they are permanently embedded in popular culture. These outliers should have sufficient brand power to overcome the double taxation issue.

But the interesting thing to keep in mind, is that this seems like a double tax only to new people. The cost of goods, manufacturing, manufacturing licensing, distribution, charge-backs, rebates, and mark-downs took out so much of the gross your head would spin. You really didn’t feel you were selling a $60 product when you saw what actually came in.

It’s only a matter of time before outlier IPs and AAA IPs start making a lot more sense. For them, I agree Shawn, they must have their eye on the leaders in quality development and user acquisition. At some point, it’s going to look like a win-win, and bam. Top Grossing becomes a whole new ball game.