Monday, August 30, 2010

Ain't Price Erosion A Bitch?

Angry Birds is the current reigning champion of iOS Paid Apps. The simple, addictive game from Chillingo & Rovio has sold over 6.5mil copies in 8 months. This eclipses former App Store phenoms like Lima Sky's Doodle Jump, which hit 5mil in June, the Tap Tap franchise from Disney's Tapulous, that was allegedly pulling down between $500k and $1mil a month in late 2009, and Firemint's Flight Control, which realized 2mil downloads within 11 months of launch. No doubt, all amazing feats from great, small companies. Moreover, the impact these companies have had in terms of introducing mobile gaming (and apps in general) to a broad audience, and in perpetuating the cult of iPhone, cannot be overstated. Unfortunately, the economics of the very ecosystem they edify are conspiring to keep them small.

As PocketGamer reported yesterday, the average price of an iPhone game is now $1.24. We can all see that the Top Paid Apps chart is now dominated by 99¢ titles. Increasingly user reviews bash titles that are priced any higher, and perhaps to appease these consumers, publishers now run frequent, often endless price promotions. Let's face it, 99¢ is the price the user community has come to expect for most games. Apple, of course, fosters this scenario, as part of their reverse razorblade model in which they provide budget priced entertainment for their premium priced hardware.

Ironically, back in the much maligned carrier deck era, the economics were actually better for top-tier games. Circa 2006/2007 the average blended global wholesale price (after carrier) for a triple-A Java/BREW title, including monthly re-ups, was about $2.25. That's more than 3X the 70¢ Chillingo, Lima Sky et al are seeing from each of their downloads post Apple. And it's not like hit games weren't doing boffo download numbers back then... in fact less competition, recurring subscriptions (in the US) and some politics conspired to create mega-blockbusters on a scale (considering the addressable user base) we may never see again. Of course, the all time king is Tetris, which has allegedly been sold over 100mil times in its various mobile incarnations... yielding at least $200mil for EA Mobile and its predecessor companies. On the lower end of the Java-era hit spectrum was the Fast & Furious franchise, which I-play openly claimed had sold 13 million units by the dawn of the iPhone era... which meant something like $30mil for the publisher if my math is correct. Then there are franchises like Namco's Pac-Man and PopCap's Bejeweled that sat between these two... closer to the Tetris end. At today's App Store prices, Chillingo would have to sell 40mil copies of Angry Birds to be in the league with these Java/BREW era revenue stars, and over 300mil to be the new Tetris. Even considering the the cost savings afforded by slicker development environments and not having to port, I'm confident that today's hit titles are far less profitable than those of the pre-iPhone era.

So, the consequence of current smartphone platforms being more democratic, and their owners being price agnostic, is that publishers not only have a significantly more difficult time manufacturing hits (in the fog of 10s of thousands of titles), but thanks to price erosion, those hits are less meaningful to their bottom lines. These dynamics, along with the added complexity of the freemium model, will further escalate a frenzied state of competition without price differentiation amongst publishers... virtually ensuring that none will amass enough wealth to aggressively scale their businesses, and that many will be forced to exit altogether. Meanwhile, it's better news for consumers, who continue to get more for less, and the hardware and network guys, who are laughing all the way to the bank.


  1. Good thing that Unreal Engine 3 is now available to push up app prices, and development budgets!

  2. All too true.

    But would Rovio, Lima Sky and Firemint got much of a look in on the old carrier decks? And if they did, what % of those revenues would be going to a publisher like iPlay or PlayerX? Selling games at 99cents is better than selling nothing for zero.

    The real impact should be observable at EA, Gameloft and the like - and their revenues are on an upwards trajectory. That means they must be selling a lot more games, so it's even more of a volume game now than it ever was. Perhaps the implications of this are yet to really make themselves felt. As you say, there are sure to be some exits, but I think a lot of those will be the smaller independents with zero marketing budget - in other words, the same sort of companies going under as before. Some things in life are constant - death, taxes, and game developers struggling...