MARCH 29, 2009 • Start-up companies trying to compete in the console game market have routinely met with failure. Even well-established companies like Philips, Apple and Matsushita have not been able to crack the market. It took years of planning and investment for Sony and Microsoft to launch successful console systems. So most people would likely laugh when they hear about a small startup that is looking to launch a new television-based game system. It probably would not help matters when they find out that this company is basing their business on the old 3DO model of licensing out the technology to manufacturing partners. With only 5 employees, San Diego-based Zeebo is trying to do all those things. Of course, it seems like an impossible task, but after visiting the offi ces of Zeebo, DFC Intelligence believes that the company is a startup definitely worth paying attention to.

3DO was one of the most renowned startups of the early 1990s. 3DO’s business model was to sell its hardware technology to consumer electronics manufacturers such as Matsushita and LG Electronics. There were several 3DO platforms available for several years, but the system never made a market impact and the business model was widely criticized. DFC has always believed that the problem with the 3DO model was more in the execution than the idea. 3DO tried to go directly against Nintendo, Sega and Sony with a premium system that launched at $700. With limited software support this strategy pretty much doomed the system from the start.

Zeebo is using the basic 3DO business model, but taking a very different approach by focusing on markets that the big console manufacturers have largely ignored. Furthermore, the company is focusing on keeping the cost to the consumer as low as possible. Zeebo is targeting middle-class consumers in what is widely known as the “BRIC” countries of Brazil, India, Russia and China. The company estimates that the number of middle-class consumers in these countries will go from about 250 million today to over 800 million in the next decade. In a very elegant way Zeebo is marrying the virtues of online micro-transaction models from Asia with the accessibility of game consoles.

The first Zeebo system is scheduled to launch in Brazil in May 2009. Brazil has a strong gaming culture, but the country has been plagued by rampant piracy. With taxes, video game systems like the Wii, Xbox 360 and PlayStation sell for as much as $1,000. Furthermore, because of piracy, companies are not able to distribute legitimate software into the market. Zeebo’s goal is to have the system at an affordable price AND have a way for software publishers to sell products legitimately to consumers.

The most interesting thing to note about Zeebo is its partners. The company was founded by Reinaldo Normand, an employee at Tectoy, Brazil’s leading video game manufacturer and distributor. Tectoy distributes to 5,000 retail outlets in Brazil and they are handling manufacturing for the Zeebo system.

The other major partner is wireless technology provider Qualcomm who invested $5.5 million in Zeebo. The Qualcomm investment highlights the key feature of the Zeebo system: software will be distributed entirely online via a wireless network. Users will buy Z-Points via either retail cards or a standard credit card, debit card transaction. These points can than be used to purchase games and eventually other applications. The games are downloaded to the system where they are stored on the 1GB of embedded fl ash memory.

The idea of using wireless distribution is critical for two reasons: 1) Brazil (and other emerging markets) have very low wired broadband penetration, but it is estimated that 80% of the country will have access to wireless 3G networks by the end of 2009 and 2) an online distribution scheme provides a way to avoid the problem of pirated software. Because over 80% of phone usage in Brazil is on prepaid cards, consumers are very used to that purchase mechanism.

Obviously with only 1 GB of storage, the content for Zeebo will not be competing with the PlayStation 3, or even the Wii. The technology of the Zeebo system is basically a cellphone inside a console. The biggest focus will be on retro titles and games that are in the 5 MB to 50 MB range. However, unlike the cell phone market which has been fl ooded with inferior games, Zeebo is going to try and more closely limit the content on the system. Zeebo has partnered with leading software publishers and the system will come loaded with fi ve titles: EA’s FIFA Soccer 09 and Need for Speed Carbon, Id Software’s 1996 classic Quake, Gameloft’s Brain Challenge and 3D Realms Prey.

The goal is to have 15 games at launch and 50 games by the end of the year. Games will cost $5 to $15 each, with an average of $10. The idea is that this price makes Zeebo software competitive with pirated software. When legitimate game software in Brazil runs for over $100, it is no surprise that piracy has become accepted as a way of life, even for the middle class. Zeebo’s model is to offer an affordable, easy to use option that is simply more consumer friendly than trying to purchase pirated software.

Zeebo’s main competition in Brazil is the PlayStation 2 which is priced at about $250. Zeebo makes some interesting comparisons between the cost of owning a PS2 versus a Zeebo. The company estimates the total cost of owning a PS2 in Brazil with 10 titles at $437 versus only $250 for a Zeebo.

Another interesting thing to note about the Zeebo model is that users do not need to subscribe to a service. Zeebo pays for the airtime while consumers are downloading software. In other words, airtime charges are basically bundled into the software purchase price. Because Zeebo is paying for airtime charges it is not feasible to offer online multiplayer games at this point. Of course, publishers and developers want to know how they can make money from a system like Zeebo. Initially revenue will be limited and Zeebo advises publishers to keep development/porting costs well below $250,000. Because Zeebo must pay for airtime costs, initially royalties will probably be in the range of 25-30% of the retail price. However, this percentage is expected to go up over time, especially for markets with less taxes than Brazil. Nevertheless, it is expected that Zeebo content will mostly be ports of wellestablished IP.

Zeebo has ambitious plans to grow on a worldwide basis. A launch is planned for Mexico in October and Zeebo hopes to enter India and Russia in 2010. Of course, the major challenge is building strong relationships with manufacturing and distribution partners in each of these regions. It remains to be seen if Zeebo can build relationships in other countries that are as strong as its relationship with Tectoy in Brazil.

The most interesting thing about Zeebo is they are going after a niche that is being largely ignored by the major players. They are also largely following the Asian distribution model that allowed a legitimate game business to blossom in pirate heavy countries like China. There is also a potential play beyond games. Brazil has a rich game culture, so the focus is almost entirely on games in that country. However, the Zeebo can also act as a data modem and has the ability to hook up with Netbooks. Therefore, when launching in a country like India, where games are not part of the culture, Zeebo may aim to focus more on such applications as interactive learning.

DFC Intelligence believes that one of the biggest opportunities in the game industry is establishing a strong foothold in emerging markets. Zeebo clearly agrees and they have built strong initial partnerships with Qualcomm and Tectoy. As is always the case execution will be an ongoing challenge and there is a great deal to approve. However, this is a product and business model to watch.