ScreenPlays: What led Artificial Life to build its business around mobile games, and around mobile games enabled by 3G networks in particular? Is that where you started? With 3G?

Eberhard Schoneburg: No, the reason we dove into this is that we started as an Internet company, and we developed all kinds of core technology for our Internet business, and when the Internet bubble burst in 2001, we had to reposition ourselves and think about what to do with it.

At the time, we developed so-called intelligent avatars, like 3D characters on the Internet, and the issue was how we could continue business not on the Internet, but still using our technology. We came up with this idea of the Virtual Girlfriend and realized that representing a nice character supporting all the intelligence available on our backbone system is only possible if we have a broadband connection. So very early on, in 2002, we started to develop all the 3G stuff, and that’s how it all began.

SP: How much of your business is based on in-house development of games and how much on aggregating others’ games or other content?

ES: We actually produce everything in house, but we also are our own aggregator, so we have an m-commerce site where we sell our products, but normally what we do is sell our products to operators, on deck or off deck through resellers.

All that we have is our own, including two product lines. One is our own core brand, like the Virtual Girlfriend or Virtual Boyfriend and other titles, and then with others’ products where we like the brand and the title and the feel, we build a product around it. For example, we’ve got America’s Next Top Model from CBS or Big Brother or Happy Feet. We license the rights for a certain movie or TV title and then convert it into a 3G interactive mobile phone application.

SP: We’re seeing a lot of people simultaneously watching TV and using their cell phones or laptops. When you make those kinds of games that are based on TV titles, is it often geared to be concurrent with watching the show on TV?

ES: Most of the products don’t do that, and it’s a little bit tricky to do, but we have a special technology called SMS Galaxy that is designed around interacting with a live TV show. You can send an SMS message into a live TV show, and with this SMS message you can attach a 3D character which could be seen in the live TV show by other people, and your avatar can interact with other people’s avatars in a live TV show. 

Most other products go the other way. So we have a TV title or series and we convert it into an interactive format. You normally cannot watch an hour TV show on your phone. The battery would run out. The phone would get very hot. You have all kinds of issues. Normal usage of mobile phones is usually just a couple of minutes, so what we have to do is take the hour-long format and shut them into smaller chunks that can be consumed in two or three minutes and make them interactive, and this is where we have a lot of know-how.

SP: You distribute games worldwide through carriers and resellers and on Artificial Life's own mobile portal [http://www.botme.com]. Given that you’re focused on 3G in particular, who and where are your primary carrier and reseller outlets?

ES: As you know, the 3G penetration is not so high yet in the world. On average, you might have 10 percent if you’re lucky. In some countries is much less. Some countries, including big countries like China, haven’t even launched 3G, so the available operators that support this are usually the big global operators – the Vodafones of the world. We work pretty much with all of them. We have over 50 global telecom partners. We have a couple of resellers, but through the resellers we normally don’t offer the 3G products because mostly the products require streaming, and for streaming applications you usually need an on-deck contract and cannot do this off deck.

So we do a mix of 2.5G, 2.75 applications and 3G applications, but the 3G applications we do only on deck, and the non-3G titles we do off deck. We also have non-streaming versions of our 3G titles and, depending on where we are, we distribute them through resellers or ourselves.

SP: And I gather the particularly hot geographies for you include Korea and some other countries in Asia? Or would you say Europe or elsewhere is comparable?

ES: As you’re probably aware, 3G is still nearly non-existent, especially in North America and South America. In Asia it’s long established. Japan and Korea were the first markets, and they still have by far the highest penetration. 

However, due to all kinds of reasons, you would be surprised to notice that the 3G applications are, even in these countries, still in their infancy.

For example, in Japan it’s iMode, and the Japanese operators for many years tried not to set up new platforms competing with iMode. What happened was they would essentially use the bandwidth for 3G-type applications to about 100 kilobits per second, which is really around the 2.5G range. So you really couldn’t do very sophisticated applications that include streaming.

It’s only just about now coming up. So even though they have the infrastructure and the handset and the mindset, which is the most important thing for these kinds of applications, there are not that many 3G applications out there in these markets. Eventually, our target markets are these more established markets like Korea, Japan, Hong Kong, which all are getting strong. Hong Kong is already launching 3.5G HSDPA. Korea is launching 4G now. I think China will make a jump to HSDPA when they launch.

But Europe should not be underestimated, because countries like Italy, Spain, the U.K. and Germany have pretty good coverage. In Italy, the penetration rate is now 25 to 30 percent with 3G – very, very high.

SP: Both AT&T and Verizon are putting out news releases about lighting up faster EV-DO and HSPA access in one market after another in the U.S., but that’s still fairly marginal for you?

ES: Yes, it is. There are about 10 million or so handsets that are 3G enabled in the U.S., out of some 200 million, so that’s still very, very small. And the coverage is very bad, even in the big cities. But it’s a matter of time. I think the forecasts are that there will be 100 million 3G users by the end of 2009. The growth rate in the U.S., I think, is very strong because infrastructure could be installed very quickly if someone decided to do it. Apple will soon come out with an iPhone which is 3G. That also would help a lot, I think.

SP: What percentage of your business is direct-to-consumer, versus through carrier on-deck walled gardens? And do you see that shifting in any particular regions?

ES: Right now our m-commerce portal is just launching more or less. It’s still marginal, maybe 10 percent of our revenue. Most of it by far is on deck, off deck and also direct installations on handsets. We have a pretty big chunk of our revenues through pre-installed applications, so when you buy a phone, it’s right on the phone.

SP: I think I’ve heard that described as ‘on-device portals’ where you would negotiate with all the handset makers to do that.

ES: Yes, exactly.

SP: Who are your most direct competitors in mobile games, particularly at this higher end in 3G that exploits that kind of capacity?

ES: You probably won’t believe it, but I don’t see any real competitor in this space. Real 3G applications means video interactive streaming, interactive games with streaming, multi-player, 3D – all kinds of combinations of the most sophisticated features, and there’s pretty much nobody else out there that is doing this. Typically, what potentially happens is that people have 2G applications which they port to 3G calls. I have yet to see interactive games that use streaming and multi-player features, besides our games.

SP: You talked about first developing core technologies. Was your Smart Engine Mobile Platform middleware, which enables your true 3G games, a result of that early work?

ES: Yes, exactly. We were forced to develop that, but in hindsight it was a very good thing. As I said, our Internet business collapsed in 2001, so we had to rethink. The first thing we had to do was adapt all the technology to the mobile space. We developed this core platform, Smart Engine, which allows us to very rapidly develop applications and then – what is the most important thing – port them pretty much semi-automatically to all these different kinds of handsets

As you know, that is the biggest problem for all producers and developers in the mobile space: the high fragmentation of the market with literally thousands of different types of handsets. We saw that very early on. It’s very different from the Internet, where you have one or two different browsers or platforms, or even compared to the PC, where you have no more than two or three operating systems.

In the mobile space, where we have in theory only four or five different platforms, every single handset has different specifications, so we have to really focus on making semi-automatic this process of systemization, localization and adaptation to these different handsets. We put a lot of money in the beginning, and this is what gives us a big advantage right now.

SP: I would imagine that with this Smart Engine Mobile Platform, or SEMP, allows you to integrate at that middleware level, rather than each and every game?

ES: Absolutely.

SP: So what is Artificial Life’s secret sauce for making these relatively higher-end games work on mobile? Beyond just exploiting greater 3G delivery capacity, is it something in your development method, or something in the way you balance client and server processing?

ES: I think it’s a combination. It’s the whole creative side of combining these different functions – the graphics, the 3D, multi-player functions – so we have a great design studio for developing game-type applications. And then the whole area of mobile know-how. Why we stick out, I think, is that we are able to handle all of these different things.    The most important thing in the 3G space is to realize that it’s relatively easy to develop a phone application for the 2G market. A simple Java game, one or two people can do this in a couple of weeks; it’s no big deal. But once you go to 3G with streaming and the scalability of hundreds of thousands of users that play concurrently, you’re in a very different space, and it’s very tricky to combine server technology and know-how with streaming and the mobile phone.

For the real big players – the Microsofts of the world – the 3G market is still relatively small. It’s only, as I say, about 10 percent of the users. They haven’t really started working in this, so they come to us and we provide consulting; we develop applications for them, instead of them doing it themselves. They might enter this space when penetration is 30, 40, 50 percent.

SP: So do you foresee, or have you already begun, any business in licensing what you’ve learned and developed to any other game developers or others?

ES: Yes. For example, we’ve licensed our Virtual Girlfriend to Disney. They were supposed to launch last year, but you might recall that they closed down their MVNO and so on. I hope early this year they will launch it in the U.S.

SP: What kinds of consumers use your games? And what kinds of games appeal most to them? From our past conversations, it’s not shooting things; it’s story, laughs, pop culture, amusement.

ES: Yes, absolutely. On purpose, in the beginning, we positioned ourselves quite differently to differentiate ourselves from these simple hunting, killing, shooting type of games. We came up with more in the artificial intelligence-driven games and more socializing type of applications. That’s also why our audience is mostly female – about 70 percent of our clients – and they engage in more social and entertaining types of applications including TV show applications. We have no games so far where you can kill someone.

SP: You did recently announce deals with Paramount to develop games around macho movie titles like Braveheart and Shooter. Does that mean that you’ll start to foray into the shooting game arena?

ES: [Laughter] Yes. The problem that happens now is that we are going global here and broadening our range. What we also have to do is go to a broader audience, and these very popular titles like Braveheart or Shooter probably will sell very well, so we’re probably diverting a little bit from our original philosophy. 

At the same time, Virtual Girlfriend-Virtual Boyfriend sold over 4 billion copies, a benchmark that will not be reached by these other games by a wide margin. Most of our business will be more social, more intelligent types of games.

SP: Can you give us a quick sketch of what Virtual Girlfriend is about? What do people do with that?

ES: It has changed a lot. We have already the third version. The original version was you have a girl who is a virtual companion on your phone, and at any time, when you’re sitting alone or something like that, you just start it and chat with her – typing in questions and chatting or flirting. In the beginning, it was accepted very well, but we realized that people got bored with just flirting and chatting.

So we started putting more game-type features into it, and it has evolved into a game now where you have a girl, and this girl has demands: she wants to go out with you, she wants to hang out, go to the bar with you, she wants to go to a picnic and all kinds of things. She gives you little tasks and duties which you have to go through. You have to entertain her, you have to tease her, you have to go buy gifts for her, you have to fend off her former boyfriend – all kinds of cute and funny things to make it sticky. You can play this whole game for a long time, a couple of months without any repetitions of these little mini-tasks.

SP: I’d imagine that’s a male demographic appeal primarily.

ES: Yeah, that’s the whole point. We also have a Virtual Boyfriend, so we have kind of the opposite, more for women. There are five different boys, and each has a little bit of a problem. One boy, for example, is a pilot who lost his license, and you have to help him to get his license back. Another boy is over-weight, and the girls have to teach the boy how to lose weight. It’s very funny, very sticky, and very entertaining.

SP: Going into more of the business model side of things, how are you and your service provider and reseller partners monetizing your games and other content? Is free, advertising-supported content the future here, or are you primarily in subscription mode?

ES: I think you’re right. The future in these games, maybe not all of them, but a lot of them, will be advertisement and sponsor supported. We have signed a deal with Saatchi & Saatchi for a new product we have developed, and there will be no end-user fees. We are working on several applications where the partner will pay for the product and download. 

So far, most of our products are paid for by the consumer, either on a one-time fee or a subscription fee. For example, with Virtual Girlfriend, you pay a subscription per month, and you normally can play it for one hour a day. We limit the play time on purpose so that people don’t get kind of addicted to the game, because there are all kinds of problems with kids playing too much, especially in Asia. The advantage of this is that the fees don’t go so high. We strike deals with the operators where, for the $5, you get all the data fees waived; it’s a flat fee, even though you consume a lot of data by streaming and downloading stuff, but it’s limited to an hour a day.

SP: Your Web site says the company also is in the business of “mobile advertisement and product placement.” Given your focus on games, is that primarily in-game ad placement? And if so, how significant a percentage of revenue is that getting to be in the mobile games market?

ES: I think it will increase very, very strongly. It is not a fit right now. We only have the first, smaller client. But I think the tendency in this direction is very strong. As I said, there needs to be other ways of monetizing. You will see a lot of games in the future being sponsor driven or free for download, and then doing product placement inside games is the way to go, as it has been for PC games or console games already for quite a while. 

The advantage of having this high-level 3G phone is you can have animation and representations of content with very high quality, and it allows you to have very sophisticated product placement, like in a movie essentially. This was not possible before when you had these primitive pixel art games. I think there’s a big market opportunity in this space, and we are designing our applications so that, for example, they can be localized, and advertisements can change in real time depending on your location or the country or culture and download automatically through our Smart Engine.

SP: So your own technology would do the ad insertion?

ES: Yes, the Smart Engine allows the real-time updating and changing of backgrounds, textures in animations and things like that. For example, if a girl walks through the city, if we detect that the game is played in London or played in Paris, we can then change the background to show, for example, local retailers and stuff like that, if there’s a demand for that. It’s not really location based, but it’s local in the sense that we’re culture-driven, and in certain environments we’re able to exchange content in real time.

SP: Community and affinity groups and sharing with friends or buddies are arguably becoming keystones in a lot of Web company strategies, there are lots of available social networking communications tools emerging like messaging, presence, location and recommendation engines that you can leverage to build active communities, and the thought is that community promises greater stickiness. Do those factors figure into your own strategy? It sounds like some of your games are already multi-player.

ES: The first big one under development, which is called Toon Mates, is essentially kind of a Second Life for mobile, but it’s cartoon based and it’s not 3D. I think the 3D element for multi-player social networks requires a lot of hardware and restrictions, so we have pretty much similar functions, like you have in Second Life. You have a community. You can go in and represent yourself with a 2D, cartoon-style avatar.

But you can check with others. You can communicate with them. In our game, each character comes with certain skills and deficiencies. You could be a punker or you could be a nurse or a policeman, and depending on what role you take on, you can do certain things and you cannot do certain things. You can chat with other people. You can build up your own apartment. You can buy clothes and all these kinds of things. I think these types of applications in games will have a big future.

SP: As handset makers and operators build in more functions like location and presence, can you leverage those as well?

ES: Absolutely.

SP: Obviously, since you’ve made it your business to pioneer in exploiting faster wireless network capabilities, even before they’re widely deployed, are you taking any actions in respect to WiMAX and to announced development of 4G networks? I understand you’ve made a start in 4G in Korea.

ES: We are lacking in the sense that we are only working on the applications layer, so everything we do is based on using languages and protocols that support the underlying platform, but we are not really too close to the hardware. This means that, if there is more throughput, more bandwidth, our games run better, can have more features and so on. But we do not rely on a certain network infrastructure. 

All these developments – Wi-Fi, and 3.5G and 4G and whatever comes out – add up to only good for us because it means, on the applications side, when you have more throughput, you can do cooler things. You can have everyone connected to everyone at all times and all these kinds of things. It’s only positive when the broadband gets wider.

SP: On that front, do you expect mobile video will fit more and more into your content down the road?

ES: It already does. Virtual Girlfriend is all streamed video.

SP: Ah. So with this history you have of disciplining your application development around pressing the constraints of a particular delivery medium, might the unique technologies and skills you’ve developed easily translate to other delivery media, if you had the resources or time or partners to pursue whole new market segments? For example, the IPTV market is opening up its middleware to third-party application developers, and the same may be true by the end of the year with U.S. cable operators.

ES: We are focusing right now strongly on mobile TV, and as I noted at the beginning of our talk, we have the technology to interact with live TV shows. The SMS Galaxy format also allows you to have streaming videos on your phone which are interactive. We’re developing interactive, live TV show formats that can run on the TV screen or on your mobile phone or both. But we are in so many markets, we have to focus a little bit and not do too much, which could be a danger for us.

SP: Have you seen any interest from set-top box makers in those interactive, live show applications?

ES: No, more TV stations for broadcast. We are literally shifting into the business of producing TV shows, especially live, interactive show formats, both for mobile and the TV channel.

SP: You and I talked recently about the openness bandwagon that has emerged around mobile content and applications, and at the time you said the potential industry control of a Google might prove a bit scarier than even the control wielded by mobile carriers, because of Google’s heft and cash and what you described as its unpredictability. Since then, Google launched its Android operating system and entered 700 MHz spectrum bidding. How are you thinking about Google now, and about the openness promises of operators like T-Mobile and Verizon Wireless?

ES: Yeah, for me, it’s a political issue, right? Since we’re doing business with the mobile operators, it’s a love-hate relationship, you know? We need them to distribute and sell our products. On the other side, they impose so many restrictions and constraints that it’s a huge headache. 

In general, what Google is trying to do is definitely a good thing – opening up the whole thing, making applications shareable between operators, and inter-operator communications. It’s only advantageous for everyone in my eyes. America is very unique. Very few countries have these very protective approaches, and you have a very big market. If they are able to change this mindset and the prevailing business models and strategies that are going on between these operators, I think it’s only good if Google is successful. 

At the end of the day, what happens then, if Google is successful, there’s a separate thing that might even be more scary, because they could get very, very dominant. If they get successful with this, then Microsoft will be a very small company.

SP: I understand you’ve recently diversified into new areas around mobile business. Where does a games developer fit in mobile business applications?

ES: Again our background really is in technology and artificial intelligence. The gaming market is just one area in which we apply that and in which we feel comfortable. But there are a lot of areas for mobile that we are not touching yet and where we don’t yet monetize, like business applications. What we’re doing with Android is going to the business operations people to enhance the functions of mobile phones.

On the other side we have the real business applications, and there one of the things we’ve gone into is the area of health monitoring – using your mobile phone to monitor your own health, especially the area of glucose level and diabetes monitoring systems. I see a huge market there. If you look at the growth rate of diabetes around the world, it’s just crazy, and the good thing with the phone is that you have it with you all the time. Each patient needs constant monitoring. If you’re diabetic, three, four times a day you have to measure your blood sugar, and you have to write it down and give it to your doctor. It just would be very cool if you could use your phone to get alerts and get advice and monitoring and so on.

So we have this technology that we are expanding right now and launching in China this year, and I think it’s going to be a big business for us.

SP: When you received additional funding early this year, you said that it will increase your flexibility to pursue opportunities including potential acquisitions. Are there any particular areas or types of companies that you have your eye on?

ES: Yeah. We have a lot of technology know-how. We have a lot of application, content know-how. Where we could be stronger is the whole distribution area. We took three, four years to sign up 50 operators, but there are another hundred out there in the world, and a lot of resellers still out there in the world. 

So to expand our sales, it might be a smart strategy for us to just acquire distributors in markets in which we are not yet either present or not strong. For example, all of South America, we have no presence. In North America we have only a small presence so far. All of East Europe we have nothing yet. India. China. So if we can find some local distributors – you know, we can’t acquire a $100-million company, but if a smaller company has existing relationships with the operators, the advantage is it would just buy us a lot of time, instead of trying to get our own contract, just acquire a company and push our product through this aggregator.

This is one of the key strategies we’re going after right now, looking after good targets in the whole distribution space.

SP: Last question. Despite the list you just went through of where you don’t have distribution yet, you’re a very global company with cutting-edge technologies. To get there, you must have had to navigate just about endless regional incompatibilities at multiple levels—regulations, business, content, technology. What advice would you give to a startup with global ambitions?

ES: Ahhh. To have a lot of patience [laughter]. The problem really is, as you mentioned, every operator is different, every country is different. If you have a very good selling product in one country, it doesn’t mean at all that it’s selling in another country. You might want to be global, but it’s very difficult to get global brands working globally.

We were very lucky that our VBoy had some kind of global appeal. We sell it into some Muslim countries, into Japan, into Europe – everywhere – and people like it. But this is a very rare case. Most of our products we have to localize and customize, change somehow the look and feel or content, and it costs a lot of money and a lot of time. It is very difficult to be global in the sense of having global products. You have to be global, but you still have to develop very local content.

SP: And when you do that, does it mean you have to have people on the ground who come from that culture and have connections with other businesses there, potential partners, and understand the local regulations and all of that?

ES: You need to understand the culture. You need to understand the markets. It doesn’t mean that you have to have local staff there. For example, we run our business with three offices, one in Hong Kong, one in Berlin where I am right now, and one in Japan. That’s it, and we are selling to a hundred countries or so.

It can be managed from a few locations. But you need to learn. We first launched the Virtual Girlfriend in all the countries around Hong Kong, including Taiwan, Malaysia, Brunei, and you know Malaysia and Brunei are core Muslim countries, and our Virtual Girlfriends were wearing bikinis, and in Muslim countries you’re not supposed to show the belly button of a woman. So we had to learn this. We had to re-dress the virtual models and stuff like that.

You need to get the experience, work with partners that know the specifics of different cultures. It can be very subtle things that cause big offense if you don’t take care of these things in each local culture.

SP: Well, Eberhard, thank you so much for your time, and we’ll be excited to follow where you go next.

ES: Thank you for your interest and your time.