Why the outlook for gaming is hugely profitable

In-game purchases make free-to-play Clash of Clans very profitable.

Angry Birds was a massive mobile game success, but it failed as a money-spinner. How does the freemium model of game play compare?

By David Walker

With more than two billion smartphone users in the world today, according to Statista, businesses that turn your smartphone into a games console could be expected to prosper.

In its Global Mobile Market Report for 2016, research firm Newzoo estimated that mobile games would be worth US$36.9 billion by the end of 2016, about 37 per cent of the games market. That’s almost as much as the US$38.3 billion made globally at movie box offices in 2016, according to Statista.

Newzoo estimates that mobile game apps are responsible for 82 per cent of total global app revenues. Yet most of the revenue from mobile games comes not from sales of the game itself, but from in-game purchases made after the users start playing.

Birth of the freemium model

Selling mobile games earns developers less than you might think. The first hit mobile game was Angry Birds, a winning combination of cuteness and playability from Finnish games firm Rovio.

At the peak of Angry Birds’ popularity in 2013, however, Rovio earned revenue of just €173.5 million, mostly from selling the game in the Apple and Google app stores. It reported losses and laid off staff before 2016’s The Angry Birds Movie spurred a rebound.

Two launches in 2012 introduced a different revenue model for mobile games. Candy Crush, by UK-based King Digital Entertainment, and Finnish firm Supercell’s Clash of Clans are both colourful, free-to-play games that let players collaborate with their friends.

“How to find and manage high-spending players is the holy grail of [free-to-play] monetisation.” Isaac Roseboom

The games themselves cost nothing, yet Supercell, for example, extracts substantial payments from players through in-game purchases of game resources – the money and goods you need in order to keep beating opponents. You could access the same resources by waiting, but payment delivers them instantly. Candy Crush and Pokémon Go have similar features.

Most players don’t spend money, but the devoted or impatient can shell out up to US$100 on Clash of Clans resources in a single click. With Supercell claiming that 100 million people now play Clash of Clans each day, that’s a lot of potential revenue.

“How to find and manage high-spending players is the holy grail of F2P [free-to-play] monetisation,” wrote DeltaDNA’s Isaac Roseboom in his blog last year.

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However, rather than expecting everyone to make these in-game purchases, the freemium model makes its money from a smaller number of long-term players. The industry uses a gambling term for its biggest spenders – whales – to describe players who spend tens or even hundreds of dollars on game resources every month.

Analysis from firms including Newzoo, DeltaDNA and SuperData Research shows these whales provide a disproportionate share of in-game revenues.

The future of gaming?

The freemium model is hugely profitable. With less than 200 employees, Supercell recorded 2015 revenue of US$2.3 billion and kept a remarkable US$930 million of that as profit.

“It’s a great business model,” says IMD professor of innovation and strategy Michael Wade. In June 2016, Chinese tech company Tencent acquired Supercell on a US$10.2 billion valuation.

While they may keep a lid on staff numbers, one thing games companies do spend money on is analysing how consumers act while playing the games.

“It is no coincidence that successful mobile game publishers also lead the way in data analytics,” states Newzoo in its 2016 Global Mobile Market Report. For example, games developers are optimising how they present discounts to those players who spend only occasionally on in-game purchases.

Millions of dollars are being invested to tease out the best way to keep people playing and pressing that buy button. Indeed, future profits for mobile game companies may rely less on developing fresh titles and more on inducing players to spend more money in the games they are already playing.

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