Emerging Markets: Brazil

Reinaldo Normand left one Brazil and returned to another. As a games journalist in 1996, Normand saw international publishers arrive in the country, attempting to mould a $50 million a year legitimate industry into something resembling the booming black market. Later, he saw those efforts stumble and recede, and his career took him to foreign shores: Mexico and China, both countries widely believed to have a stronger future for gaming than Brazil.

In 2010, after six years away, Normand returned. Much had changed. As in many emerging games industries, the rise of mobile and social development had radically altered the stakes, presenting new opportunities where none existed before. Whether Brazil was able to create its own FarmVille or Angry Birds was basically irrelevant; it was now feasible to create, publish and make a living from games, and, everywhere Normand looked, people were doing exactly that.

"I found a lot of small developers, most of them with no experience making games," he says. "That's a fallacy that most people in the industry have in their minds: 'These people don't know how to make games. They will fail.' But there are people who have rarely touched games before - people that were bankers, consultants - and they are building small teams for mobile games and being reasonably successful. I think it's a matter of two or three years for some of these mobile teams to be getting into the top spots."

"Brazil is the one of the most social countries in the world. They are the consumers of tomorrow. And those overwhelming numbers will continue to grow with the development of the smartphone installed base"

Bertrand Chaverot, Ubisoft

In terms of both development and retail, Brazil is one of the world's fastest growing markets for smartphone gaming. At present, there are an estimated 240 million mobile devices among the country's 200 million citizens. Only 10 per cent of that number are smartphones, but that's rising all the time: according to Naoki Yamamoto, head of GREE's Latin American business, it will reach 35 per cent by 2015 - around 80 million devices.

Every major mobile manufacturer is clamouring to meet demand in countries like Brazil with locally assembled, low-cost hardware. Once these product's hit the market their impact may even exceed GREE's projections, bolstering not only mobile but also the country's thriving social network community.

"Brazil is the second-largest country in the world for Facebook, in terms of users. They already have 47 million members here, and their growth rate is second to none," says Bertrand Chaverot, managing director of Brazil and South America for Ubisoft, one of the longest serving publishers in the region.

"Brazil is the one of the most social countries in the world. People like to argue, comment, talk and share without any restraint or inhibition. Young Brazilian people between 18 and 24 years-old spend 5 hours per day on Facebook, and if you look at girls between 15 and 18 years the average is even higher: 6.2 hours per day. They are the consumers of tomorrow. And those overwhelming numbers will continue to grow with the development of the smartphone installed base."

That Brazil will become one of the leading markets for both social and mobile spending is regarded by those contributing to this article as an inevitability. However, Normand, who co-founded the social studio 2Mundos in 2011, has significant doubts as to how much Brazilian developers will benefit as a result. A few years ago, the Google-owned Orkut was by far the most popular social network in the country, and Brazilian developers like Vostu enjoyed great success in what was effectively a closed market.

"What I've seen in the last year is Facebook has destroyed Orkut, in terms of perception and in terms of content," says Normand. "What's happening now is the big Brazilian developers are struggling on Facebook, because they're competing against the games they were 'inspired' by - which is the nice way to say it - and they're having trouble. In 18 months, everything has changed: the cost of user acquisition on Facebook is much higher, and developments costs went from $200,000 to $300,000 to $4 million."

"In 18 months, everything has changed: the cost of user acquisition on Facebook is much higher, and developments costs went from $200,000 to $300,000 to $4 million"

Reinaldo Normand, 2Mundos

2Mundos is fighting this trend by developing games based on IP from other media. By choosing the right partners, its products can tap into the Brazilian public's existing cultural interests, as well as leverage its partners' user acquisition funds. According to Normand, it's one of the only feasible ways of competing in a market that, until relatively recently, didn't include Zynga.

"We started 2Mundos with the goal of making 'local' social games. I believe that social games are a cultural phenomenon, like movies or music. They are free, the barriers of entry are very low, so I treat them as a cultural product. And in big countries in terms of population, like Brazil, these games can have a very strong local component. It's impossible to compete with Zynga internationally, but it's possible to focus on the local market and do a good job."

MusiGames' Americo Amorim has adopted a similar strategy - in philosophy, if not the details. A subsidiary of Daccord Music Software, MusiGames was established in 2007 to create music apps and games for iOS devices. In the context of the crowded AppStore, it has been a success, with several top 10 hits and, in Drum Challenge, a genuine chart-topper.

However, like Normand, Amorim is building success by refining focus, addressing the need for educational games in Brasil's increasingly tech-savvy schools - digital content was included in the educational budget for the first time this year, and MusiGames intends to have the products ready in advance of demand.

"About six years ago there was huge demand for games in education, and people were talking about it," he says. "The problem was that the companies that made them at that time was not a games company... Games in education as a subject died, because the kids didn't want to play them.

"Last year, as we were developing our games for music education - and they are real games, with social integration, rankings, and everything - and we started to show them to the schools here, they said we should do them for Portugese, for maths, for sciences. The demand is really starting to grow right now, because the schools and the educational publishers are seeing that what they tried in the past weren't really games. This is going to be a good market in one or two years."

"For the bricks-and-mortar business these countries are going to be the next really big markets - it's going to be Brasil, it's going to be China"

Bertrand Caudron, formerly Electronic Arts

More importantly, by narrowing its field, MusiGames was able to raise $1.5 million in VC funding in 2010, which is virtually unheard of for an early-stage games company in Brazil.

"In Brazil, funding in general is a problem," Amorim says. "There was no community of VCs or Angel investors, but last year a lot of VC companies from the US started to come over to Brazil, and right now we're seeing a far better scenario for developers looking for funding. It's still not as good as it should be. It's still tough. But in 2009, when we started to speak with investors, there were maybe 6 or 7, but now there's more like 20 willing to invest in early-stage companies."

Digital platforms have also allowed both local and international companies to sidestep the country's protectionist import laws. In Brazil, the government places gaming in the same category as gambling, which has pushed the price of imported consoles and games to levels that even wealthier countries would find unacceptable - £600 for an Xbox 360 and £100 for a copy of Call of Duty, just to give you an idea. With piracy still a significant problem, it's small wonder that the official console market has remained so small, while companies in digital markets like Riot Games and Zynga have moved into the area so aggressively.

"The government is very protectionist in protecting national companies against multi-nationals. It's a really, really strong state-of-mind," says Bertrand Caudron, who, as EA's manager of Latin America from 1999 to 2007, understands the effects of the Brazilian government's policies all too well - Caudron now runs Digital Sherpa, a business development agency with strong ties to Latin America.

"The reason is two-fold: they want to make sure local business can grow, and they want to make sure that companies wanting to sell products on the Brazilian market also produce them in the country and create employment. Many other industries have gone for that... All of the major electronics companies have opened factories in Brazil, producing TVs, computers, but these are bigger markets so it's probably worth it.

"The video game industry doesn't work in exactly the same way - it's much more centralised - but because it worked for the other electronic industries the government just said, 'Why should I change my mind for video games?'"

According to Ubisoft's Chaverot, the bureaucracy has only now begun to ease. After many years of lobbying and raising awareness, international publishers and local companies have managed to communicate how "unfriendly" Brazil had become to the one of the world's more dynamic industries. Change is coming, but the wheels turn slowly.

"All of the major electronics companies have opened factories in Brazil, producing TVs, computers, but these are bigger markets so it's probably worth it"

Bertrand Caudron, formerly Electronic Arts

"They have tried to alleviate the burden by offering some tax reductions and tax incentives - like the "Rouanet" law being extended from Cinema to Software development - but without definitive tax reform we'll continue to see limited solutions that do not incentivise major investments.

"For games on DVD and consoles, the first parties are aligned and working hard together to convince the government in Brasilia that a tax reduction would be paid for many times over by the growth of the market. Discussions started a long time ago, some decisions already have been made, and now we are waiting for the official announcements. We're crossing our fingers things will work out. It would be another boost for the growth of our complex but promising Brazilian market, not to mention a help for the economy leading into the World Cup in 2014 and the 2016 Olympic Games."

With more encouragement from the government, Caudron strongly believes that Brazil could provide the sort of strong growth on which the AAA console industry has all but given up. Revenue from the legitimate market in the PlayStation and PlayStation 2 era may have been small, but one interviewee described the black-market as "like a party," and Caudron recalls his surprise at discovering there was no official PlayStation 2 business when he arrived in the region in 1999.

"How was that even possible? PS2 was booming everywhere, it was such a dominant platform. And there were a lot of machines coming through, but all of them through smuggling, parallel imports, and Sony had absolutely no plan, and even no interest, in doing anything in the region officially."

Caudron estimates that anywhere between 5 and 10 per cent of North American hardware sales were being taken to Latin America for re-sale, amounting to "millions and millions" of PlayStation 2's in the region. And these machines were changing hands for prices similar to legal retail elsewhere in the US or Europe. In Brazil, however, the cost of being a legitimate console consumer excluded almost the entire population - legality simply didn't make sense.

"I found myself in a difficult position: I had a car, I had an engine in the car, but I could only run it on one piston, so I sold the opportunity on the PC market. The PC market was really healthy at the time because it was easy to replicate locally. EA has always been open to localisation in language and in content... but the one difference I made is I started offering our distribution capacity to our competitors.

"EA was the first international publisher installed in the region, so the other publishers had a choice of distributing PC products with local companies under a licensing model. But it was a very unstable market: some of these companies were appearing and disappearing overnight, and a lot of questions were being raised over how honest [they were].

"Today, the Xbox is the leading platform in Mexico. I happen to know that Mexico is the third worldwide market for Xbox, after North America and Canada"

Bertrand Caudron, formerly Electronic Arts

"I used that: work with local companies where you don't know if you're going to get paid, if they are actually paying for what they produce, or you can work with us, your competitor, but we're an American company, and credible, and blah, blah, blah. As funny as it sounds nowadays, we were distributing in Brazil for Activision, LucasArts, Ubisoft. Between 1999 and around 2004, EA had something like 65 or 70 per cent of the PC market."

The console business continued to teeter on the precipice of its tipping point, until, in 2003, the attention of the global games industry shifted. By entering the North American Trade Agreement, Mexico could now provide the sort of environment that companies like Ubisoft and EA been struggling to create in Brazil. With both countries falling under the broad 'Latin America' region, the majority of publishers were forced to prioritise, and Brazil was put on hold.

"All of a sudden you could import software with absolutely no import duties, and hardware with very low import duties," Caudron recalls. "Microsoft then jumped the opposition and launched the Xbox very, very strongly - lots of marketing, a perfect operation. And they took the market. That's why, today, the Xbox is the leading platform in Mexico. I happen to know that Mexico is the third worldwide market for Xbox, after North America and Canada."

The same may well be true of Brazil, even without assistance from the government. Ubisoft puts the country's emerging middle-class at nearly 70 per cent of the population, and the boost in consumer power has prompted Microsoft to start local assembly of the Xbox 360. This has reduced the retail price of the console by more than 40 per cent, and, with the assistance of companies like Konami and Ubisoft, has opened the Xbox to a huge addressable market.

"It's going to become a reference point, as in 'before that' and 'after that'," says Caudron. "I think the market is now really, really going to explode. They divided the public retail price by two, and their sales have sky-rocketed. That's the kind of difference it makes, and they've done it for hardware and software.

"All of that is going in the right direction. At this stage, Microsoft has done it, and there are strong rumours that Sony and Nintendo looking hard at it, because they know that if they don't jump on that train they'll lose the market. For the traditional console and packaged goods market, I believe that Brasil is going to enjoy three or four years of really strong growth.

For Caudron, the focus has shifted again. Where five years ago any international publisher would have set its sights on Mexico, now it would locate in Brazil. As we patiently wait for the next run of consoles, it would be a mistake to disregard Microsoft's decision to begin assembly of the Brazilian Xbox 360 now. With Xbox Live adding more digital content all the time and the retal price tumbling, the next generation of consoles will have countries like Brazil built into their strategies.

"They have to take them into consideration," Caudron says. "For the bricks-and-mortar business these countries are going to be the next really big markets - it's going to be Brasil, it's going to be China. For me, there's no doubt about why Microsoft made that decision."