Mobile Pie’s Will Luton on why the growth of freemium games is inevitable
Physical and digital economies are vastly different. Games, movies, music and books have made the transition from the former to the latter. It’s been disruptive and those companies that have won in the new digital frontier have been those embracing new economic thinking. Understanding the differences between physical and digital products is key to profiting from the economies that drive them.
Compare apples and apples
Last week, Tracy Erickson’s wrote three opinion articles about freemium games – Freemium is more hype than hope – which contain what I believe to be flawed logic, although I agree with some of his conclusions.
One of Tracy’s arguments is a shop giving away ice cream must be giving away a lower quality product than a premium-priced ice cream retailer. The logic is a product provided for free must have a negligible production cost and therefore be of poor quality: the parallel is then made to describe the difference between freemium and paid mobile games.
This is common consumer thinking in a physical product market. Tesco or Walmart value ice cream is cheap, so not as good as Haagen-Dazs. You pay more, you get a more expensive to produce, and thus better quality, product.
The consumer understands that is a supply chain and that cream and sugar don’t come for free. In a physical market, paying more means getting more or getting better, even if that is manipulated by marketers, and yes, the premium price point of Haagen-Dazs is disproportionate to its quality increase; its premium status is almost entirely due to marketing.
In a digital economy however, the supply chain is servers and networks, a cost so small we discount it.
Product development is a front weighed cost in both cases, creating the ice cream recipe and the game, but where digital and physical differ is in production.
In physical economies, materials are subject to a cost. In digital, there are no materials, only bits and bytes, and these are ostensibly free. There’s also no distribution cost; or at least in the case of the App Store, it’s obfuscated through revenue share.
Hence, equating quality to price in a digital world doesn’t work: paying for a game doesn’t ensure it’s of higher quality.
Tracy states that “Freemium games work well in China because gamers don’t value software in the same way as Americans or Europeans.”
The suggestion that the dominance of freemium in Asia is a cultural one is good. However, the sentiment that it is because the Chinese place less value on software is short sighted.
China is a burgeoning economy and one that hasn’t been subjected to hundred of years of modern capitalist economy, prefixed with notions of physical product consumption, brand and value. They have a different perspective based on the realities of digital economy.
This may account for the prevalence of piracy. Free has been a reality of the Chinese digital economy for a long time. The Western digital economy will get to this point too, but slowly, as new generations of consumers entering the marketplace with little ready cash, begin to consume free products. They build an understanding of how the market functions, enjoy free products and carry that into later life.
Build the community
Tracy also states: “If you download Smurfs’ Village for free, play it once, and then never open the game again, Capcom makes no money from you. If you download Angry Birds for 59p/99c, play it once, and then never start the game up again, Rovio makes 40p/60c from you.”
This is missing a major point: freemium isn’t about making money from every single user. It’s about generating revenue from a group of paying users.
A profitable game is one where the cost of production, plus the marketing, is less than the revenue generated. The cost of getting a user to play your game is much higher for a paid title, as you need to convince them to take time out and pay 59p. In free, you are asking only for their time.
All adds up
Freemium revenue models are peppered with esoteric acronyms: ARPU, DAU, MAU, PPI etc. But the basics are simple. If the average lifetime revenue of the user, from first to last play for all ads viewed, offers taken and purchases made, is more than the marketing costs to get someone in to your game, you’re making profit.
For every 59p spent on an app, post-tax 36p is paid to the developer. If Angry Birds sells 1,000 copies, Rovio’s made £360. If Smurfs’ Village gets 1,000 installs, 900 people play without paying, but 100 people buy a £5.99 SmurfBerries pack, that generates £365 revenue for Capcom.
The marketing spend to get 1,000 installs is much less in free than paid, so the net profit is much higher already. The non-paying 900, if they enjoyed the game, will have brought more people to it, who do pay. Or they may have an advert or branded content served to them, taken up a pay per install incentive, or otherwise generated revenue through another means.
Freemium is a much more complex and demanding model than paid for content. For this reason, making analogies with physical markets is confusing the single biggest difference that digital benefits from: free infinite reproducibility.
The end game
Yet I agree with Tracy when he says, “Freemium will play a role in gaming’s future, not the role.”
There are still vested interests inside and out of the industry that want to continue operating a paid model for their content, but freemium’s growth is inevitable.
In the longer term, however, I believe a Spotify-style subscription model will emerge strongly in the market, with users subscribing and pay-per-playing blockbuster, small, old and new games on handhelds, mobiles, consoles, PCs, TVs, 3D goggles and those ever-hyped cortex-hijacking brain implants. (Source: Pocket Gamer)