Digital content distribution has disrupted several notable industries. With the original iPod media player and iTunes Store, Apple changed the face of the music industry. And the Internet, in particular, has played a role in commoditizing news. All told, digital distribution of media has starkly impacted news, magazines, books, television, music, film and more.
Recently, no industry has been more impacted by digital distribution than video games. Leading the disruption are iOS and Android devices, whose free and inexpensive games, distributed across a massive installed base of powerful and networked tablet and mobile phone form factors, have already disrupted billions of dollars of game revenue. In this blog post, Flurry focuses on how mobile devices have severely altered the shape and flow of revenue in the multi-billion dollar portable game category.
Portable gaming, played primarily on Nintendo DS and Sony PSP devices, has been dominated by these two companies for over two decades. In this model, at retail, consumers pay around $200 for the gaming device and up to $40 for popular game cartridges. Because of the similar form factor, overlap in consumer base (especially younger players on iPod touch) and the casual nature of game content, Flurry combines iOS and Android devices with traditional portable devices to form the category. With the inclusion of smartphone game revenue into the category, shifts taking place in market share become clearer.
The chart displays the share of U.S. revenue generated for portable games from 2009 to 2011. Note that we project November and December for 2011, based on their ratio to the first 10 months of the year, as observed in 2009 and 2010. Starting on the left, for 2009, we calculate $2.7 billion in total U.S. portable game revenue. For 2010 and 2011, we estimate $2.5 billion and $3.3 billion, respectively.
The most striking trend is that iOS and Android games have tripled their market share from roughly 20% in 2009 to nearly 60% in just two years. Simultaneously, Nintendo, the once dominant player, has been crushed down to owning about one-third of market in 2011, from having controlled more than two-thirds in 2009. Combined, iOS and Android game revenue delivered $500 million, $800 million and $1.9 billion over 2009, 2010 and 2011, respectively.
As reported by Flurry earlier this year, the freemium game model is revolutionizing and expanding revenue on mobile devices. And just as smartphone game revenue has climbed aggressively, Nintendo DS and Sony PSP revenue has dropped precipitously. Over the last three years, Nintendo and Sony posted a combined $2.2 billion, $1.6 billion and $1.4 billion for 2009, 2010 and 2011, respectively.
Within the portable category, an abundance of digitally distributed free and $0.99 games, available on hardware, that is both comparably priced and more powerful than traditional portable game devices, better appeals to many consumers. As a result, the days of paying $25, or more, for a cartridge at a retail store may soon end. Further, the installed base of iOS and Android devices has not only reached critical mass, but also continues to grow at unprecedented rates. In their latest public statements regarding installed base, Apple and Google reported a total of 250 million iOS devices and 190 million Android devices activated, respectively.
Due in part to its demise in the portable game category, Nintendo is facing its first fiscal year loss since the company began reporting profits in 1981. Combined with slumping Wii sales, Nintendo is indeed struggling, even with its powerful stable of original IP led by Mario Brothers, and despite the fact that the exchange rate between the Japanese Yen and U.S. dollar is currently in its favor.
Equally concerning for Nintendo is that the battle for video game dominance is entering the living room, with entries by both Apple and Google into the TV category. Ostensibly, this new class of hardware will create a new platform upon which the digital distribution model of apps will be overlaid. Now, in addition to tablet form-factor competition, the console game industry, which currently pits Microsoft, Sony and Nintendo against each other, will additionally face competition from Apple and Google TV initiatives. Beyond 2011, if Nintendo continues to face financial hardship, it may be forced to consider difficult choices such as divesting its hardware business and distributing its content, for the first time, across non-proprietary platforms.
In our last review of the portable game category, comparing 2009 to 2010 revenue, we believed Mario was already “standing on a burning platform.” With 2011 numbers now added to the story, it appears that the inferno has intensified, and that Nintendo may truly face a Nokia-like decision to jump or perish in the flames of its own burning platform.
A Note about Methodology
For this analysis, Flurry used a combination of publicly available data, released across several reports by the NPD group, along with its own data collected from mobile devices. Flurry Analytics tracks more than 20 billion use sessions per month across more than 125,000 applications on more than 330 million unique devices per month. Nearly 40% of all app use sessions occur in games. With its coverage across applications, Flurry can reliably estimate the revenue generated per ranked position in the iTunes App Store and Android Market. With this data, Flurry calculated year-over-year revenue generated by the smartphone gaming category, and combined this with available Nintendo DS and Sony PSP software sales.
The era of mobile computing, heralded by Apple in 2007 with the debut of the iPhone, has put powerful, networked computers into consumers’ hands. Onto these devices, consumers have downloaded billions of apps. In 2011 alone, we estimate that 25 billion iOS and Android apps will be downloaded. And Flurry expects that number to roughly double in 2012.
Like other new technology, adoption of iOS and Android devices began primarily in North America and Western Europe, where disposable income is higher. However, as prices have come down for older iOS models, and OEMs supporting Android have offered more affordable down-market devices, we’re seeing a clear shift in consumer app usage to international markets, including emerging economies. Let’s warm up with a chart showing how mobile app sessions are expanding outside of the U.S.
The chart above compares mobile app sessions tracked by Flurry Analytics in January 2011 and October 2011. Flurry now tracks over 20 billion mobile app sessions per month across more than 120,000 applications. The green area shows the percent of app sessions occurring in the United States, the dominant mobile app market. While the absolute number of sessions in the U.S. has doubled between January and October, its share of total sessions has declined from 55% to 47%. This means that the rest of the world is growing faster. Looking at the balance of the top 10 countries (UK, Canada, Australia, France, Germany, Japan, Indonesia, South Korea and China), this group has increased in collective sessions by 2.7 times between January to October, resulting in an increase in total session-share from 28% to 31%. Further, the rest of the world (another 217 countries across which Flurry tracks user sessions), has increased in session-share from 17% to 22%. Among all this growth, there is one country that has caught our attention more than any other.
Meet the Mobile Dragon
You may have heard of China, and its 1.3 billion people. In fact, you most likely associate the country with high volume, affordable manufacturing. However, China is also fast becoming one of the world’s most promising consumer economies. Earlier this year, Bloomberg reported that 2010 foreign direct investment in China rose to a record $106 billion. Included in this are investments by companies such as Wal-Mart, which co-invested over $500 million in online retailing. According to the International Monetary Fund, China has the world’s second largest gross domestic product, behind the U.S., and ahead of Japan, Germany and France. Additionally, the Boston Consulting Group released a report in November 2010 forecasting that the number of middle-income and affluent consumers will almost triple in the next 10 years to 415 million. As it relates to mobile, China has the most cellphone users in the world, with over 950 million users according to statistics released by China’s Ministry of Industry last week.
To understand how this translates into mobile app adoption, Flurry compiled a list of the fastest growing mobile app markets in terms of sessions tracked by our service. We show the chart below.
This chart ranks the top 10 countries, in terms of mobile app session growth, from January 2011 to October 2011. To be included in the analysis, countries had to have generated at least 10 million monthly sessions in January. Inspecting the chart, it’s clear that China’s growth is astronomical. While the top 100 countries are averaging session growth of over 200%, China is delivering more than four times this growth rate, spurred by a massive population voraciously adopting applications.
China Vaults to Second Largest App Economy
With its hyper-growth in app sessions, China has moved up the ranks among the world’s top countries to now occupy the second spot behind the U.S. The graph below charts China’s share of total mobile app sessions per month, relative to other top countries during 2011. Note that to get a better view of movements among countries ranked second through fifth, we exclude the U.S. from the chart, given its scale.
China, represented by the red line, began the year ranked tenth in terms of app sessions, with 1.8% of all sessions tracked by Flurry. By April, China had climbed to fifth with 2.7% of all sessions, and, in July, overtook the United Kingdom to become the second largest country, with 5.4% of sessions. By the end of October, China had further grown to 7.3% of sessions. The U.S., which declined in sessoin-share over the year, finished in October with 47%. If both China and the U.S. were to continue along their respective trajectories, China could overtake the U.S. by the end of 2013, with both countries converging around 23% app session-share.
Finally, we took a look at AppCircle, Flurry’s mobile app traffic acquisition network to understand advertising dollars companies are willing to spend on acquisition per market. In this part of the business, we measure from which country consumers are downloading news apps advertised to them. The country of origin is a reflection of geographic consumer demand. Overall, downloads of new apps from China grew from 1.2% to 12% over the course of the year, from January through October. Similar to the total growth we saw in Flurry Analytics user sessions, the Flurry AppCircle network grew by 2.5 times. The chart below shows AppCircle-driven downloads per country for the month of October 2011.
Whether studying China by existing app session generated or new demand for apps, the growth rates are similar. As one of the fastest modernizing and largest countries in the world, the adoption of mobile apps in China is unprecedented. For app developers, who more traditionally look at North America and Europe, China is a market too compelling to ignore. A new market has emerged, and China is the new mobile app dragon.