In October of 2013, Softbank Capital made a $1.5B USD investment in Supercell, the maker of two successful mobile games, giving Softbank a 51% ownership of the game maker. This investment caught the world’s attention. It wasn’t just the rich $3B USD valuation Softbank placed on Supercell that intrigued onlookers, but more the speculation that Softbank and its CEO Masayoshi Son were onto a bigger trend. Mr. Son has a solid track record in anticipating big shifts in worldwide markets in general and the tech industry in particular. In the mid-nineties Softbank was a publishing powerhouse. By the mid 2000s the company became an Internet powerhouse. Today, Softbank is the third largest wireless carrier in the world. So what does this investment signal about the big shift that Mr. Son is anticipating? At Flurry we believe he is placing bets on the Mobile Content Explosion that is taking place around us.
Early Indicators Signal the Content Explosion
At Flurry, we have always looked at the applications being started on our platform as a leading indicator of the app economy’s health. This is very similar to how U.S. economists treat housing starts as a leading indicator for the national economy. Typically, developers engage with Flurry and start applications on our platform a couple of months before they list them on App Stores. So if the activity on Flurry increases, it signals that more apps (and content) will be available on the stores within a couple of months.
Looking at application starts on the Flurry network since January 2012, we see an increase in the quarterly growth rate. This is in stark contrast to theories that the app ecosystem is congested. In fact, in just over 18 months, the rate of which new apps are being started on the Flurry network has nearly doubled as shown in the chart below.
While Flurry’s market share in analytics could have increased, we don’t believe it is the major factor in the acceleration of applications starts. Instead, we believe that we have entered a new phase of mobile content explosion, driven by rapidly changing consumer behavior. Over the last two years, application developers and media companies have seen the shift from personal computers to smart mobile devices including phones and tablets that are now in the hands of over 1.2 billion people worldwide. They have also seen the wild and global success of gaming, utility and messaging applications such as LINE, Kakao, Snapchat and WhatsApp. They are simply acting accordingly. With the hopes of reaching these 1.2 billion people with a press of a button, app developers and media companies are building mobile apps like never before.
There is an Audience for That
Pundits have criticized the increasing number of apps and have often claimed that while there are millions of apps out there, very few are being used. They also claim that a few app developers have the lion share of usage, especially in the United States and other mature markets such as Japan and South Korea. Earlier this year, a report from Comscore claimed that Facebook (and Instragram) accounted for 26% of all times spent on mobile. In its latest earnings reports, Facebook’s COO Sheryl Sandberg almost confirmed Comscore ‘s numbers and claimed that Facebook’s share of people's time is larger than that of YouTube, Twitter, Tumblr, Snapchat, LinkedIn, AOL and Yahoo combined. While Facebook’s reach and percentage of time spent are in a league of their own, there appears to be plenty of whitespace for others. In fact, just on the Flurry platform the number of independently owned app developers that have a worldwide audience of over 20 million Monthly Active Users (MAU) has jumped from 7 in Q1 2012 to 32 in Q3 2013. That is whopping 357% growth in 18 months.
In the same period, the number of app developers with an audience over one million MAU has risen from just under 400 to 875, a whopping 121% growth.
These numbers are simply unprecedented, especially because most of these app developers have risen organically, and not as a result of consolidation or through mergers and acquisitions. If anything, the market, its reach and the time spent on mobile is still with the “middle class”, or the mid-tail developers and content owners. Among the 1.2 billion device owners, app developers are finding millions of people to enjoy their apps and the content behind it.
Flurry’s numbers, which show the fast rise of app developers with large audiences, seem to indicate that worldwide, consumers with smart devices are still hungry for apps and mobile content, and app developers are building at increasing rates to feed this demand. We believe that once again, Softbank’s Masayoshi Son could once again be onto something really big.
Just five years ago, PCs reigned supreme and so did the US software industry. In 2008, U.S. companies produced an estimated 65% of all PC software units sold on a worldwide basis.
In only half a decade, smartphones, tablets, and perhaps most importantly, apps, have changed the nature of the software industry. In this post we look at where apps are being developed and used and discuss the implications of that for the Post-PC Era software industry.
More Apps Are Now Being Created Outside The U.S. Than Inside The U.S.
Let’s start by considering where apps are being produced. The chart below shows the percentage of the apps that were recording data through Flurry Analytics as of the start of June in a given year broken down by whether they were created in the US or in another country. As shown in that chart, even in 2011, only a minority of apps were created in the US. By June of this year only 36% of the apps we measure were made in the U.S.A.
U.S. Made Apps Still Dominate App Engagement, But Their Share Is Slipping
Of course, some apps enjoy much greater use than others, so we next considered how the picture changes if apps are weighted by total time, which takes into account both user numbers and engagement. Once time is taken into account, things look considerably better for the U.S., suggesting that, on average, user numbers or engagement are greater for apps made in the U.S. than for apps created elsewhere. That makes sense given the size of the U.S. population, the fact that it was an app pioneer country, and the number of English speakers in other countries who might be able to use U.S.-made apps without any localization. Nonetheless, even the weighted percentage of apps made in the U.S.A. has dropped in the past year.
Use of Local Apps Is Strong In China
This should not lull U.S. app developers into a false sense of security however. That becomes evident from examining where the apps used by people in particular countries are made. That’s what the chart below does, starting with the United States. Nearly sixty percent (59%) of the time U.S. users spend in apps is spent in apps developed domestically, meaning that more than 40% of the app time of U.S. consumers is already spent in apps developed in other countries.
And while U.S. made apps are used elsewhere, unsurprisingly, people in many other countries spend a significant amount of their app time in apps developed in their home countries. For example, 13% of the time spent in apps in the UK is spent in apps made in the UK and 8% of the time spent in apps in Brazil is spent in apps made in Brazil. But as is so often the case, it’s China where things get really interesting. Nearly two-thirds of the time spent in apps in China is spent in apps made in China. U.S. made apps only account for 16% of total time spent in apps in China. The size and growth rate of the Chinese app market imply that the worldwide share of time spent in apps that are produced in the U.S. can be expected to contract further.
Translating apps and adapting apps to make them culturally appropriate is necessary in a country such as China to get most people to download and use most apps made elsewhere. Until recently, rapid growth in countries that didn’t require that type of effort meant that many developers based in the United States probably didn’t want to bother. With growth in the smartphone, tablet, and app markets in countries such as the U.S. slowing and a lot of remaining room for growth in countries such as China, some developers may now be reconsidering that position. It will be interesting to see if many can successfully adapt their apps for world markets.
While many U.S. app developers are just starting to think about globalizing their apps, it has been a near necessity for developers in some other countries from the beginning. Consider the situation facing a developer in a small country where the local language is not one of the world’s dominant languages. Unless they create an app with global appeal (e.g., a flashlight app), or that can be adapted to local markets relatively easily (e.g., translation of a weather app), they are likely to end up with very few users. That is a problem since the time required to develop an app for a small number of users is no different from that required to develop an app used by a large number of people.
App Developers In Other Countries Have A Head Start Globalizing
Creating global or localizable apps turns that problem into an opportunity. The chart below suggests that developers in countries such as Finland, Denmark, Bulgaria, and Slovenia are taking advantage of that opportunity. The numbers in the chart reflect the impact of app developers in a given country by taking the total percentage of time users worldwide spend in apps developed in that country and dividing it by the total percentage of apps developed in that country. Note that this is equivalent to taking the 2013 percentages in the second set of charts in this post and dividing them by the 2013 percentages in the first set of charts. For example, 70%/36% = an impact of 1.9 for the US. A metric of one or greater indicates that, on average, apps developed in a given country command a disproportionate share of time. The bigger the number, the greater the impact of apps developed in that country.
Given the dominance of English, the tendency of U.S. cultural products to spread internationally, and the fact that much of the app economy developed in the U.S., it’s not surprising that the metric for the U.S. is greater than one. China’s large population and the difficulties developers outside of China face developing for that market also make its high impact somewhat expected. What’s much more interesting is that the other five countries that have an impact metric of one or greater are all small, and four of the five speak relatively rare languages.
Globalization Of The App Industry Can Be Expected To Continue
This, and the low cost of app development imply that the app part of the software industry has the potential to become truly global. For example, as of June of this year, developers in twenty-three countries contributed at least 1000 apps to the more than 350,000 apps Flurry measures worldwide.
There are already examples of worldwide app hits that were developed outside the United States. For example, Angry Birds was developed by Finland based Rovio and has become a worldwide success with hundreds of millions of downloads. The same applies to Cut the Rope, which was developed by Russia-based Zepto Labs and Fruit Ninja which was developed by Australia-based Half Brick Studios.
Three key factors suggest that the markets for apps and app development will become increasingly global.
First, the App Store and Google Play take a lot of friction taken out of software distribution in the app world.
Second, the market is already very large and growing quickly in many parts of the world. In July of 2013, Flurry tracked 1.15 Billion monthly active devices. As our results have shown, there is still some ‘home field advantage’ for local developers, but in theory developers anywhere can create apps for users anywhere.
Third, the cost of development is still relatively inexpensive, especially if you factor in the average salary of software engineers in countries like the Philippines, The Ukraine, and Brazil. The cost of promotion is rising, but total costs are still a fraction of the cost of development, packaging, distribution, and marketing packaged PC software.
In short, geography is becoming increasingly irrelevant in the Post-PC Era.
The popularity of iOS and Android gaming is driving among the largest disruptions in video game history, already eclipsing portable platform gaming revenue. With low barriers to entry and potent revenue generation possibilities across more than 500 million active iOS and Android devices in the market, casual gaming is reaching new heights on mobile.
In this report, Flurry compares traditional versus independent game companies in the new mobile app marketplace. To set the stage, let’s get a current read on which kinds of apps consumers use most.
Gaming Dominates Mobile App Usage
For the first two months of 2012, Flurry Analytics measured that more than half of all end user sessions were spent in games. Across January and February, Flurry observed sessions across a sample of more than 64 billion applications sessions across more than 500 million iOS and Android devices. In addition to the snapshot above, we lay out the trend in app session growth over the last three years.
Game Session Growth Exploding
The above chart compares normalized game session levels seen in 2010 versus 2011 and 2012. We did so by first taking game sessions tracked by Flurry Analytics in Q1 of 2010 and setting that as a baseline. We then compare gaming sessions observed in subsequent years against the 2010 baseline. By our calculations, 2011 and 2012 gaming session grew by 5.3 times and 20.5 times, respectively, over the level observed in 2010. Note that we use the first quarter of each year, extrapolating Q1 2012 from January and February of this year.
Indie Games Dominate Consumer Usage
For the above chart, Flurry separated game sessions between indendent game developers who started their businesses on iOS and Android versus established gaming companies who extended to iOS and Android from other platforms. Starting from the left, in 2010, we see that about 60% of all mobile game sessions occurred in games built by independent studios. In 2011, this figure declined slightly to 56% primarily due to a wave of consolidation by established game companies who acquired independent studios (e.g., EA acquiring Chillingo, Zynga acquiring Newtoy, DeNA acquiring Ngmoco and Gameview, etc.). However, in 2012, another larger wave independent companies appeared to emerge, overwhelming established companies once again, pushing indie game session share to 68%.
Historically, the video gaming industry has been ruled by brands and established IP from a few major game publishers such as Electronic Arts, Activision, Ubisoft, THQ and others. High production, marketing and distribution costs created formidable barriers to entry. High retail price points created risk for consumers to try new titles with which they were not familiar. For these reasons, brands published by larger companies dominated the landscape.
With Apple and Google entering the ecosystem, the rules of competition have changed dramatically, arguably creating the most open, egalitarian market in the history of video games. Flurry first wrote about this phenomenon in 2009 in a series entitled The Rise of the Middle Class. While we would have expected indie game developers to fare better early on in the history of iOS and Android mobile app platforms, it's remarkable that their dominance has grown over the last several years, with no signs of slowing. Even when traditional, established game companies have attempted to buy a stronger position on iOS and Android through acquisition, the reduced importance of brand power in mobile app gaming allows indie developers to continue to innovate and capture increasing consumer mind share.
In the new smartphone app economy, Apple and Google have truly empowered indies to thrive. And among indies, game developers are thriving the most.
To free, or not to free
Among the most common questions we get from game developers is whether the free-to-play (a.k.a. freemium) model makes sense for their next game. For teams that have always charged players up-front with a premium pricing model, the thought of distributing games for free makes them very uncomfortable. I made the switch myself when I joined a free-to-play social games startup as a Studio Director in 2009, so I’m well aware of both the anxiety and the opportunity.
To best answer this question, I decided we should do it the Flurry way: with hard data. To do so, we compared the revenue generated by pricing model, freemium vs. premium, among the top 100 grossing games in January and June of this year. Premium simply means charging for the download (e.g., $0.99). Freemium describes the free-to-play model, where the game is given away for free, and then the consumer can purchase virtual currency and/or virtual goods through in-app-purchases. Tracking over 90,000 apps with its analytics service, Flurry can measure the amount of revenue generated per ranked position in the App Store top grossing category. The chart below compares the proportion of revenue generated by each model.
Inspecting the chart, we see that free games already represented 39% of the games revenue generated by Apple’s App Store in January, but that number has since risen to 65% last month. The traction of the freemium business model is undeniable and growing fast. In fact, with games often occupying more than 75% of all top 100 grossing apps in the app store, it’s the single most dominating business model in the mobile apps industry today.
Unleashing the beast
In the old paid world of video games, success was measured by multiplying the number of units sold by the unit price, the traditional retail model. In the new world of digital games distribution, it’s all about how many players you can keep engaged with your free game, followed by how many compelling spending opportunities you can provide them.
When you make your game free and add in-app purchases, two powerful things can happen: first, more people will likely try your game since you’ve made the “ante” zero; and second, you will likely take more total money, since different players can now spend different amounts depending on their engagement and preferences. It’s not unheard of for individual players to spend into the tens of thousands in a game they like.
Flurry data shows that the number of people who spend money in a free game ranges from 0.5% to 6% depending on the quality of the game and its core mechanics. Although this means that more than 90% of players will not spend a single penny, it also means that players who love your game spend much more than the $0.99 you were considering charging for the app. And since you gave away the game for free, your “heavy spender” group can be sizable.
Free-to-play is here to stay. If you’re a game studio, you simply need to understand how to take advantage of this game-changing opportunity. In future posts, I’ll cover strategies and tactics you can employ to make this powerful model work best for you.