[Editor's Note: Jeferson is Flurry's GM of Games, who works with iOS and Android game developers to build more profitable games]
Digital distribution of games is disrupting the retail portable game category. At the heart of this disruption is the proliferation of iOS and Android devices, which is doubling as a powerful portable gaming platform and challenging Nintendo DS and Sony PSP for gamer mindshare. In previous reports (2008 - 2009, 2009 - 2010), Flurry measured that iOS’s and Android’s revenue share of the U.S. portable game software category exploded to 34% in 2010 from just 1% in 2008.
Over this same time period, we calculated that Nintendo’s U.S. portable game revenue share contracted to 57% from 75%. All the while, Nintendo chief executive, Satoru Iwata, has remained outspoken, calling smartphone games worthless and warning the gaming industry of boring consumers. In contrast, Wedbush Morgan Securities veteran video game analyst, Michael Pachter, stated in April 2011 that “Nintendo will have to share the market with Apple and Android” because “the onslaught of $1 games is going to continue.” By Flurry’s calculations, the onslaught is now coming in at a crushing $14 per transaction and from within the Trojan horse of freemium (a.k.a. free-to-play) games.
Here we dissect transaction sizes within iOS and Android freemium games, the current juggernaut of smartphone game business models. This report builds on analysis released earlier this month, when Flurry revealed that games drive 75% of revenue generated among the top 100 grossing iOS apps, of which 65% were generated from freemium games. In the chart below, we look at how 3.5 million consumers spent their money across top iOS and Android freemium games.
The left-hand column shows the distribution of transaction sizes within freemium games: in other words, how many times consumers spent anywhere from $0.99 to sometimes over $100 per transaction. Each purchase equates to a virtual good or currency in the game a consumer is playing. We organize the data into three price buckets: under $10; from $10 - $20; and over $20. You’ll see 71% of all transactions are for amounts under $10, 16% are for spends between $10 to $20 and 13% are for amounts greater than $20. The average amount spent per transaction is $14.
Let’s spend a moment on the $14 average, which may seem high to you at first blush. There are two reasons the average settles here. First, within the “under $10” bucket, most transactions cluster at the $9.99 level, followed by $4.99, and finally $0.99. In fact, in total, consumers spent $0.99 less than 2% of the time. Why then would so few consumers spend just $1 in freemium games when this price point is so popular among premium games (the pay-before-you-can-play model)? Because freemium games drive a different decision-making mindset for consumers. They simply are deciding whether or not to spend. Our data shows that around 3% of consumers will spend money in freemium games. A deep commitment to the game experience appears to influence their buying habits. The second reason the $14 average seems high is because the high-end of the spending spectrum is very high. Among all purchase price points, over 5% of all purchases are for amounts greater than $50, which rivals the amount paid at retail for top console and PC games.
Now, let’s look at the amount of total revenue generated per price bucket. Scanning this column, we see the amount of revenue generated per price bucket is flipped in comparison to the price points at which the bulk of transactions occur. On the low end, we’re “packing sardines;” that is, accumulating a lot of small transactions. While the under $10 bucket delivers about two-thirds of the transactions, it only accounts for about one third of the dollars. On the other end of the spectrum, at the “over $20” spend-level, we find the “whales.” In fact, further breaking down the “over $20” category, 30% of the total revenue is generated from transaction sizes of over $50. If you’re a game designer, your main take away is that very few transactions—and consumers who complete those transactions—make up the bulk of your revenue. Therefore, your “meta-game” should be about whale hunting.
By the end of 2011, Flurry estimates that total U.S. iOS and Android game revenue will surpass $1 billion. Digital distribution has already affected notable Media & Entertainment industries including film, newspaper, television, music and books. The video game industry is no exception, with portable gaming already feeling the impact. The key to any business playing in this space, whether incumbent or challenger, will be to understand and command consumer engagement, and turn that engagement into revenue events. The freemium business model on mobile, enabled by a device that is always with consumers, and always connected, is unlocking profound new ways to deliver value and extract revenue from consumers, and for far more than just $1 at a time.
In this new age of mobile computing, the long-term success of Apple and Google depends largely on their ability to amass third-party developer support. Developer innovation improves the way consumers connect with others, entertain themselves, work, and more, all through apps. The more a platform provider can attract unique and superior content, the more appealing the hardware device appears to consumers prior to purchase and the more loyal they become afterwards.
Last week, Apple reported that it had sold a cumulative 200 million iOS devices. Currently the App Store contains more than 425,000 apps, with total downloads surpassing 15 billion. From the developer’s point of view, the most attractive aspect of the iOS consumer audience is that they all have credit cards on file with iTunes. This means 100% of them can seamlessly pay for apps and in-app purchases. All told, the App Store offers a powerful business opportunity to developers and has attracted leading mobile developer support.
At the same time, Google’s more open Android OS distribution strategy has garnered the support of numerous notable OEMs, spawning a rapidly growing installed base of Android devices that is gunning to overtake the iOS installed base. With broader distribution across more carriers, Android device activations surpassed 500,000 per day tweeted Andy Rubin last month. This growth is up from 300,000 activations per day reported just last December. In terms of apps, the Android Market has 200,000, and Google said it crossed the 4.5 billion downloaded application mark in May.
At Flurry, we regularly track developer support across the various platforms that compete for their allegiance. When companies create new projects in Flurry Analytics, they download platform-specific SDKs for their apps. Since resources are limited, the choices developers make in building for different platforms strongly signal their confidence in those platforms. They are literally investing their R&D budgets in the hopes of generating future revenue. In total, over 45,000 companies use Flurry Analytics across more than 90,000 applications. For this report, we compare Q1 to Q2 new project starts.
Studying the numbers, it’s readily apparent that Android has lost developer support to iOS. Specifically, Android new project starts have dropped from 36% in Q1 to 28% in Q2. Overall, total Flurry iOS and Android new project starts grew from 9,100 in Q1 to 10,200 in Q2. Of note, this drop in Android developer support represents the second quarter-over-quarter slide, which follows a year of significant, steady growth for the Google-built OS. Over the course of 2010, Android developer support had steadily climbed each quarter, peaking at 39% in Q4 2010.
Considering the events that could have precipitated this shift in developer support, Flurry has identified two probable causes:
1. iPhone Launch on Verizon: With iPhone’s arrival on Verizon in February 2011, three and half years after launching on AT&T, Apple closed the most significant vulnerability gap in its U.S. distribution, and likely worldwide. In fact, with its lengthy exclusive distribution agreement of iPhone on AT&T, it could be argued that Apple itself gave Android the opportunity to reach critical mass on other carriers, most notably Verizon. In that time, Google, Verizon and a host of OEMs worked hard and fast to push Android devices as an alternative to AT&T’s iPhone juggernaut. With Verizon’s launch of the iPhone, the pendulum appears to have swung back in favor of iPhone over Android development.
2. iPad 2 Launch: Establishing an installed base of more than 20 million tablet devices in less than one year, the iPad success story has been compared to taking a buzz-saw to the PC industry. Apple’s iPad shipments, from its last disclosed quarter, were higher than the initial first two quarters of iPad availability. Apple has additionally claimed that it is seeing the “mother of all backlogs.” Building efforts lag behind consumer demand for the device. We believe that wholesale consumer acceptance and adoption of tablets, which just a year ago was questionable within the industry, is further luring developers to build for iPad instead of Android.
While Android’s device installed base continues to surge, ongoing work to improve the Android Market layout and to push forward the adoption of Google Checkout are critical to its success. PayPal’s recent acquisition of mobile payment player, Zong, demonstrates that Google may not be enabling consumer payment quickly or well enough, which is inviting 3rd party competition and creating billing fragmentation. Furthermore, the development community is concerned about the rising cost of deploying across the Android installed base, due to the double whammy of OS and storefront fragmentation. With developers pinched on both sides of the revenue and cost equation, Google must tack aggressively at this stage of the race to ensure that Apple doesn’t continue to take its developer-support wind.
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.