Interview: Glu talks Q3, iPhone, Android and more

If there was ever a good day to bury bad news, it was yesterday. Glu's announcement of a $56.8 million net loss for Q3, along with a gloomy outlook for Q4, was quickly overtaken by the wider celebrations around the presidential election.

The company's Q3 revenues of $23.9 million represented decent growth year-on-year, even when you factor in the acquisitions of companies like MIG and Superscape, which both bumped up revenues. So why the gloom?

"In truth, we were less disappointed about Q3 than we were about our outlook for Q4," says president and CEO Greg Ballard. "We missed our numbers, but only by about $150,000. But the slowdown that we see in Q4 is what's causing more uncertainty. Q3 was not as calamitous as the numbers might have suggested."

It's true that writing down loyalty guarantees, exchange rate fluctuations and a sizeable $46.6 million goodwill adjustment - "less about the operating performance of the company, and more a function of where the stock price is, and mechanistic things that have to happen when valuing the balance sheet" – contributed heavily to the net loss.

But in its results call, Glu referred to wider economic factors behind the slowdown in growth it expects to come in Q4, and particularly the corresponding slowdown in new handset sales.

"We know that games are typically purchased in the first 90 days of owning a handset, so if people are buying fewer handsets, then fewer games will be sold," says Ballard. "And in the US, when people did buy new handsets, a lot of them bought the iPhone..."

Yes, that. It's tempting to wonder if Glu missed the boat initially when it came to iPhone – it's only released one game so far, Space Monkey, in comparison to the more bullish approach of its close rivals EA Mobile and Gameloft.

"We're excited about the iPhone roadmap for 09, but right now we don't have a big roadmap for it," says Ballard. "We made a tough decision about how much we were going to invest in iPhone, and frankly we made the right decision, although it was a controversial one."

It's worth getting into that tough decision, though, because from the outside it seemed a puzzling one. Mainly because Ballard was one of the first mobile games industry figures to publicly talk about how important iPhone might be as a new platform for games. It was a surprise to then see Glu fail to follow through on this with a series of games – and it seems even Glu was concerned at one point.

"We went into this quarter a little bit nervous, hearing that EA and Gameloft were going gangbusters with iPhone games," says Ballard. "But frankly we were a little surprised that their [Q3] results were not better. If Gameloft really did have robust sales from iPhone, and it's their largest customer, we can't reconcile why their growth rate was only point eight of a percent more than ours. Especially as they were benefitting from some of the exchange rate problems we were suffering from."

Exchange rate fluctuations are a moveable excuse, of course. Gameloft talks about how it's suffered from them in comparison with EA Mobile in the past year or two, for example. Maybe everyone's right.

Still, this doesn't explain why Glu took a cautious approach to iPhone. Ballard says it's partly down to Glu's corporate culture and overall strategy. "If truth be known, on all these big technological changes – multiplayer, 3D, advertising on Java and BREW – we have always been a little bit slower than the others," he says.

"These changes take a lot longer in the mobile business than people expect, and there's usually a fairly large penalty for being too aggressive. Look at the people who launched a ton of 3D titles early on. They took it on the chin, because they spent a lot and didn't get nearly as much back as they hoped. Whereas we eased our way into that, and are now as proficient as anybody, if not more so."

The way Ballard tells it, Glu took its time on iPhone in order to build out its in-house resources organically. And he has something of a zinger for one rival to illustrate why, saying that they "got a lot of games out on iPhone by going to outside studios".

"We heard they would do the game at one studio, then shift it over to another place to do the accelerometer work, and then someone else would do the touchscreen," he says. "I don't know i that's entirely accurate: it's just the rumours you hear at studio level..."

Whether that's true or not, Ballard's argument is that by taking its time, Glu is integrating iPhone more seamlessly into its overall development strategy, as it is with other platforms like N-Gage and Android. The aim is to be able to produce games across all these platforms when desired, rather than hold them in silos.

It's a legitimate strategy, although the alternative – of getting iPhone games out quickly and making learnings – is too. Glu clearly learnt a lot from Space Monkey, particularly in how to vary a game's pricing to drive App Store success. Would a few more games have been even more useful though?

"We would have loved another couple of titles to do the same sort of tests," Ballard admits, saying that Space Monkey was particularly suitable for experimentation – Glu dropped the price to free at one point to build buzz, then switched back to a paid model.

"It was good partly because we own the IP, so don't have to talk to anybody when we drop the price to 99 cents," he says. "And we have elasticity data that is better than a lot of other people's, including the data of having a free application. And we saw a title that had not really caught on suddenly become the number one game application in a three-day period of it being free. It tells us that quality will rise, even among free applications. Although we don't know what that means in terms of a model yet."

One issue for Glu in making the most of iPhone in 2009 is which games it can bring to the platform. Ballard already hinted at one issue with big branded games – that there may be less flexibility for the kind of pricing strategy that can send a game zooming up the App Store charts – but there's also a question about consumer demand.

A game like The Dark Knight or Transformers will sell well in the traditional mobile ecosystem because the carrier promotes it – regardless of whether that game is good, average or bad. Although in the case of movies, there's an additional factor of whether the film is a hit or a flop (e.g. Speed Racer)

But on iPhone, so far there's been little proof that Glu's big movie brands will sell, some of the console brands it distributes on mobile may revert back to their parents (e.g Sega, Konami) for iPhone, and some of Glu's casual gaming brands (Zuma, Diner Dash) look set to be published on iPhone by their creators too. Is Glu left purely with own-IP games and a few brands?

"You'll see a pretty healthy balance between the two," says Ballard.

"We'll maybe have more original IP than we've had in the past, but we're not abandoning our branded strategy for iPhone. We think a title like World Series of Poker or others that we're not announcing yet will do well. However, original IP does have a better shot on iPhone than it has had with the carriers. But big brands in some version will be successful on iPhone. There are lots of different formats we can explore..."

Applications, perhaps? It'll be interesting to see if Glu goes down the road of making branded iPhone applications around some of its big brand licences – a different business model to branded games.

Still, iPhone and Android do bring big challenges for a company like Glu, and many of its rivals. Think about a medium or large mobile games publisher, which in most cases are entirely geared up to doing business in the carrir ecosystem. So these companies pay big money for brand licences because the carriers will sell them, while the majority of their marketing is focused on co-promotions with operators rather than direct-to-consumer campaigns.

Yet suddenly, the App Store and Android Market come along, and throw all this up in the air. "It's definitely a challenge," says Ballard. "We have talked about it internally, and talked to our board about it. It changes the way in which we do business, and some of our internal thinking. But that's why we're bringing different kinds of people in to be able to embrace what is essentially more of a web or internet model than it is a carrier model."

Another challenge, of course, is that the traditional operator channels aren't disappearing – companies like Glu are having to keep one foot in the old model, while gearing up for the new. Ballard says this should become a strength, not a weakness. "There will be some developers who are successful in developing just for iPhone, but we'll be able to create as powerful a game for a lot less money," he says.

"Say a new developer focused on iPhone spends $300,000 to develop a game. We believe that for roughly 30% more – so $400,000 – we can create a game that's not just for iPhone, but also N-Gage, Android, Java, BREW, Windows Mobile and BlackBerry. It's an example of where our ability to scale becomes important."

Glu is determined that spending on developing advanced mobile games won't cost the earth because of this, although there will be new marketing costs, particularly when trying to make a game cut through open retail environments like the App Store or Android Market.

Ballard is interesting on this point, though, saying that the marketing will be different – focusing much more on customer relationship management and community building – that web/internet model again. We'll get to how Glu is approaching that in a while.

One last money question though. Glu's Q3 results has sparked talk of how long till the company's cash runs out, given its prediction that it'll end the year with around $17 million in cash, with some hefty earn-out payments due to shareholders in MIG in the first half of next year.

Glu says it's breaking even operationally, and will be able to fund the payments. However, the company has said it'll be making cuts to reduce its cash burn. And the question is this: at a crucial time when it needs to be investing in iPhone, N-Gage and Android, is it the worst time to have to be reining in spending overall?

"There's no way I can deny that," says Ballard. "I wish we had more revenue or more cash to cover the costs of this investment. This is one of those moments where investment is really an important thing – everyone from Gameloft and EA to smaller companies feel the same way. But you have to make sure that whatever you invest is something you can afford."

Ballard says that Glu's solution is to redeploy its Superscape studio capacity into these advanced platforms, while also benefiting from the ability to roll individual games out across several platforms at once.

"We've managed to keep operating expenses where they were before, but still get the investment level we think we need," he says. "As success is proven, we'll be able to invest more going forward. Unlike some companies that are spending a ton of money, we're still being cautious."

It's easy to get focused on iPhone, but N-Gage and Android are clearly important for Glu too. What about N-Gage though, given EA Mobile's trenchant criticisms of Nokia's gaming platform last week. Is it still a goer? Ballard praises Nokia for its willingness to listen to publisher feedback, and says it has Glu's support.

"There are some things that need to be fixed," he says. "The complications of developing for N-Gage are still way too high, and the time it takes to deploy is still too long. But the single biggest thing they can do is sell a whole bunch of N-Gage devices. We're seeing increases every week in our sales, and it's a function of how many devices they've sold. We think it's going to be a very successful platform for us."

Meanwhile, Glu was early onto Android Market with two titles (both own-IP) – Brain Genius 2 and Bonsai Blast. Ballard says the publisher is impressed so far, having done tens of thousands of free downloads, and established a good working relationship with Google. "We're rooting for it to be successful," he says. "In the first week or two, people have been very active on the G1 handsets, including and especially with games."

One final question: social gaming. Glu is currently recruiting a VP of social gaming and a web-gaming engineer, with both job ads mentioning Facebook and other social networks. How important will this area be to Glu in 2009?

Ballard says that the VP role isn't quite what it seems – it'll also cover building communities and social buzz around Glu's existing mobile games. "It's less about Facebook and MySpace and that kind of social gaming, and more about thinking about the iPhone, Android and N-Gage as social communities," he says.

"It's about how do we market to those people, and making sure we're thinking about a modern approach to marketing on those platforms. And this isn't separate from the carrier business either. We're looking to build connections between the carrier business and these new platforms. How do we look at that as one large ecosystem?"

Are the operators up for this? They've tended to be a bit worried about games extending out beyond their environment, even as elsewhere within the operator, people have been banging on about openness and Web 2.0.

"They're more open to it than they were a year ago," says Ballard. "They're looking for leadership from content providers like us. If you can go in with a very thoughtful way of connecting the dots, they're more responsive today than ever before. Our job is to exercise that leadership, and ensure their ecosystem doesn't end up getting isolated and turned into an island."