Close
Are you sure? Are you sure you want to report this comment? I understand, report it. Cancel

Gold Rush 2.0

Fri 23 Apr 2010 7:00am GMT / 3:00am EDT / 12:00am PDT
Business

Promises of a new wave of profit for iPad developers ignore the destructive downward pressure on iPhone game prices

Apple

Established in 1976, Apple is a multinational corporation (corporate headquarters based in California)...

apple.com

As the overseas launch of the iPad approaches, and the United States prepares for the arrival of the 3G models of the tablet system - which are likely to bring with them a significant surge in demand, if the pre-order figures being bandied about are realistic - many developers will be casting their minds back to statements made during the gadget's much-hyped launch in January. In particular, some will recall the promise of a "second gold rush" - a new wave of success for app and game developers, comparable to the heady early days of the iPhone and iPod Touch.

The concept of a gold rush brings to mind the unbridled optimism of realising that there are untapped veins of profit waiting for the right people to come along and exploit them - open pastures as yet untouched by the big corporations who dominate other sectors of the market, ready for small, enthusiastic and innovative people to move in and make their mark.

Students of history, however, will point out that real gold rushes also tended to have much darker consequences. Battles between rival prospectors and a wanton disregard for the environment meant that the human and ecological costs of gold rushes could be immense, leaving behind a barren, scorched landscape and dusty, desperate towns filled with those who couldn't afford to escape to greener pastures. There's a good reason why many of the most bleak Westerns are set in the aftermath of a gold rush.

In other words, it's worth taking a closer look at where the iPhone gold rush has left the market before we all get too excited about the prospect of doing it all over again on the iPad.

There's no question but that the iPhone has been an immense success as a gaming platform. Software revenues on the device have overtaken the PSP in the United States, according to some measurements - and even if other metrics are more dubious on this claim, the fact that a platform where games almost all cost less than $5 is even in the same ballpark as one where the games cost $25 or more is astonishing.

Moreover, it's undeniable that much of that success has fallen into the laps of small, plucky developers rather than the established publishers. Larger publishers have certainly had hits on the iPhone, but most of the platform's runaway successes have come from newcomers or independent developers. Their success is enabled by Apple's largely agnostic approach to publishers, with the firm much more willing than other platform holders to promote worthy indie efforts over the heads of less appealing titles from industry behemoths, and is amplified by the low overheads of small studios, who can therefore enjoy far more of their success as profit.

Not all of the promised land's rivers, however, run filled with milk and honey. Huge problems have emerged in the iPhone game market - problems which the iPad risks repeating, or simply carrying over.

The most obvious problem is pricing. From a consumer perspective, the iPhone offers extraordinary value, with many great games selling for under $2 - and some good titles going for under $1, or even for free. This is the result of intense competition on the platform, which has pushed prices down closer and closer to the App Store's lower limit (79 cents, or 59 pence) as the device's lifespan has extended. What started out as price points for simple, cheap games have gradually become ingrained in consumers' minds as being the price point everything should aim for - and more expensive software has to work very hard indeed to justify its pricing.

Of course, if a game creator can sell something for $1 and make a profit from it, then he is perfectly entitled to do so - that is the market at work. Game publishers may be unable to compete with that, since they have much larger overheads and costs, but the beauty of an open market is that it allows small, nimble companies with low costs and good ideas to undercut lumbering, inefficient rivals.

The problem is that, in conversation with iPhone game developers, it seems increasingly obvious that many of them cannot sell their titles at $1 and make a profit from them - but feel forced to opt for lower price points in order to win the consideration of consumers in the first place. They are playing a risky gamble, hoping that by establishing the game as a success they will create an opportunity for profit down the line. In doing so, they give the vicious circle another hefty push, ensuring that other developers, too, cannot break out of this destructive cycle.

Just as gold prospectors scorched the earth behind them, so too have developers on the App Store critically damaged the ecosystem in which they operate. The extent to which prices on the App Store have collapsed are not the result of a healthy market - they're the consequence of a perversion of the dynamics of the market by developers willing to sell at a loss in order to make a land grab, forcing others to follow in their footsteps and keep the downward pressure mounting.

The consequences of this problem will reach out and touch the iPad, too. Already developers attempting to launch products at higher price points on the iPad are being hammered in reviews for "profiteering" - a dirty word in some quarters, perhaps, but hardly unreasonable if you're one of the iPhone developers who's been sucking down losses on your games for the past year.

Two solutions present themselves. The first is for Apple to enforce more tight price controls on the App Store, raising the lower boundary for games to bring an end to this destructive cycle. That, however, won't happen - and nor should it. Quite laudably, Apple views itself as being beholden to one group of people only, namely those who buy its hardware. With no significant vested interest in the software end of things, it's not particularly concerned about pricing, and would prefer developers to work things out among themselves.

The second solution, then, is the one that must come to pass - and that's the abandoning of up-front pricing for games entirely. If it's not possible to sell App Store titles for 79 cents each and make a profit, then companies must turn to other solutions. In-app purchasing and advertising are the two obvious candidates, along with a version of the old shareware model from the heyday of the PC platform - but there may well be other business models out there as well. In particular, the launch of Apple's own iAd network - a shot across Google's bows if ever we've seen one - should make game developers sit up and take notice.

For years, commentators have argued that "freemium" models such as these could be useful additions to existing business practices. On the iPhone at least, events have overtaken such ideas. An understanding of Freemium on this platform isn't just a nice-to-have - as developers plough salt into the ruins of the pricing tiers on the App Store, Freemium may well be the only way for good games to capitalise on one of the world's fastest growing gaming platforms.

12 Comments

Nicholas Lovell
Founder

187 175 0.9
Couldn't agree more, Rob. ngMoco has put out a presentation showing how quickly it can make vastly more money from free games. It estimates it makes $0.08 per Daily Active User (DAU): $0.03 from the 2% of DAUs who buy virtual goods and the remainder from display advertising, lead generation and being paid by other app manufacturers to drive installs of their</em>apps.
If a company as big as ngMoco has said that *all* its games will be free in the future (and it has), the future of paid apps looks bleak indeed.

Posted:4 years ago

#1

Nicholas Lovell
Founder

187 175 0.9
Oh, I should add another point: the top 10 grossing apps in 2009 were all, bar Flight Control, premium games with prices of $4.99 or above.
They were also established brands from EA and Gameloft which big licencing fees and big offline presence. If you subtract the costs of development, marketing and licensing from the gross margin, I'm not clear that the more expensive projects are raking in better profits.

Posted:4 years ago

#2

Yannick Boucher
Project Manager

27 1 0.0
"If you subtract the costs of development, marketing and licensing from the gross margin, I'm not clear that the more expensive projects are raking in better profits. "

But that's anybody's guess. One can't make assumptions.

Posted:4 years ago

#3

Nicholas Lovell
Founder

187 175 0.9
Surely it's an analyst's job to make assumptions :-)

Posted:4 years ago

#4

Martyn Brown
Managing Director

138 33 0.2
I don't think there's been a huge swathe of marketing spent on iPhone games to date. We had one of the top 3 game apps in 2009 and sold consistently at $4.99 with no promotion whatsoever. We're still in the top 20 10months on, with negligible marketing and purely brand presence, aligned with a good level of quality on the actual game. Then again, we might be an anomaly. I did a talk 4yrs ago and said we'd make more profit from smaller, cheaper digitally distributed titles than next-gen titles and people scoffed. Not sure who's making tons of money from next-gen now apart from a few big hitters.

Posted:4 years ago

#6

Gregory Keenan

102 11 0.1
Interesting read, and while I realise the focus was on the iPhone moving onto the iPad and pricing structures, i think it did fail to point out the incredibly restrictive development procedures for the iPhone and iPad
-they can only be developed on Macs
-Apps need to be approved and can be removed without warning
-Apple can/does re-write the terms and conditions to block certain apps(Adobe Flash)
-You can only sell your app on the Apple app store and not directly via a website
-Cost for a dev kit/registered developer

I am curious why there was no mention of the iPhones up and coming rival: Android? In which there are very few restrictions. As part of my course, i chose to do a module in Mobile phone development, and all the students (including my self) bought android phones afterwards, several selling there iPhones just to get one.

Back more on topic, the free or very cheap app issue is less of a problem on Android, while the development costs may be comparable to the iPhone in terms of man hours, there is no cost (depending how you do it) in getting the development kit, setting up a computer to run it (runs on Linux, windows and macs) were with iPhone Development, your looking for a recuperation of costs for BOTH man hours and the dev kit.

linkys for anyone interested: [link url=http://gizmodo.com/5479298/android-app-store-is-57-free-compared-to-apples-25
]http://gizmodo.com/5479298/android-app-s...[/link]

But this should all be looked at against the size of the app stores vs exposure. However Android does allow developers to publish apps from there own web pages.

Edited 2 times. Last edit by Gregory Keenan on 24th April 2010 1:35pm

Posted:4 years ago

#7
Gregory - there's no mention of Android simply because as yet it's a fairly unproven platform for games. Despite the growing stature of Android devices in the market, there's little sign of game developers making serious money out of them, as they are on iPhone. I don't doubt that this will start to happen soon, but right now, everything is happening on iPhone OS platforms rather than on their rivals - although by the end of the year, the landscape could be very different.

Martyn, absolutely - I think a lot of established publishers have been stunned by the rise of these platforms, and they have no excuse, because developers and others have been telling them this would happen for years.

Posted:4 years ago

#8

Christopher McCraken
CEO/Production Director

110 251 2.3
Interesting article. All of the points made are relevant. However, I think you failed to make one obvious conclusion: all of the things you mention add up to one more thing, a barrier to entry.

It's what killed Apple in the late 80's and all through the 90's. They niched themselves to death. Sure, MacOS (System 7) was nicer, and more stable than windows. It could do things Windows could not. It still was not enough, and the barriers to entry were downright hostile to most developers, and *especially* indie houses.

Here we are again, in 2010, and Apple is again coming dangerously close to winning a few battles and losing the war. Adobe, with AIR and Flash are already doing a beta of clean builds to android. In the late 80's and early 90's Apple had the better thing, but lost to Microsoft overall. They almost did not recover. This time around, they will probably lose to Google. Failure to understand history usually results in repeating it.

That said, my company and I have zero interest in iProducts. The barrier to entry is not only high, but ridiculous. It's not cost effective, and the risks cannot be calculated. Therefore, it looks like roulette.

You should never go to Vegas with the company bank account. =)

Posted:4 years ago

#9

Tom Keresztes
Programmer

655 270 0.4
The analogy between Apple and Windows is sound, however the mobile market is completely different. And its no longer the 90s, its the 010s. User experience and coolness factor sells the iPhone, not hardware and/or software.
And the android market... well, it does not exist yet. But 2010 will be the year.... wait, they said the same about 2008 and 2009... ;)
As an iPhone developer, my opinion is that Apple learned from their mistakes. Most of their stuff is opensource anyway, including the OSX kernel, the developers documentation as good as MSDN.

And only the games in the top 50 list make serious money, the sales curve rapidly falls off after that, combined with a piracy rate of around 90% (we had pirates playing multiplayer games 2 days BEFORE the first legitimate user).. but no one talks about the dark side of the gold rush.

Posted:4 years ago

#10

Victor Perez
CEO

64 0 0.0
IPhone is mobile games, but IPad it is not!! You are mixing everything.


Posted:4 years ago

#11

Jeremie Hugues
Studying Master

4 0 0.0
IGames have also the great advantage to be short (or boring). You have to change, which makes the market more flexible than other devices.

To Mr McCraken:
In the 80s/90s Apple fought on Computer standarts and lost. Now Apple came back through a backdoor, the music market and especially the iPod. They have a notriety and a good brand image (all my fellow students think Apple=the best) which made them competitive again on the computer market and now the Samrtphone Market.
The barrier you talk about is real. Tough it raises a Paradox: people want cheap apps, meaning a loss of quality ( sorry for publisher/devs but i think there has to be a loss) but they buy a very expensive device. Take the costs of an iPhone and you can buy a netbook or even a low end computer with that money (at least in Europe). The iPad has an incredibly high price, which makes me think the average customer will have other requirements. I would think the iPad owner to be more wealthy than the iPone owner and be able to spend more on games.
As for Android, for the moment it suffers from the lack of visibility. Google may have forgotten some communication on the system. The iPhone is iconic: it is a device, it is Apple,... Android is a software, and few people are interested in software.

To Mr Perez:
When the iPhone came out everybody asked the same questions. My concern would be who buys an iPad? It is a business device before entertainment (I mean who watches a movie in the bus?). But now its Apple, which mens it will be more used for entertainment than business. if you want something positive about it: it will bring the PDA to masses. Moreover it is bigger than the iPhone meaning you could have better quality games on it. Finaly it is just released, thus it is not to late to release more expensive software in order to prevent such pricing pressures.

Posted:4 years ago

#12

Login or register to post

Take part in the GamesIndustry community

Register now